At the much anticipated meeting of the Chinese and US presidents in San Francisco on November 16, Xi Jinping said that “the modernisation of China’s 1.4bn people is the huge opportunity China brings to the world”.

As he moved to stabilise relations between the world’s two biggest superpowers, the Chinese president reached for a hymn sheet that felt a bit old hat: China’s growth is the world’s growth.

In recent years — and, incidentally, for as long as I’ve been in my role at fDi — the narrative has been rather different. Unlike the source of sure-fire growth it had seen in the 1990s and 2000s, China has become a headache for multinationals: an intertwining of risk and necessity.

Before the pandemic, the US–China trade war spurred businesses to start implementing ‘China +1’ strategies. Then came Covid-19, border restrictions, Beijing’s regulatory clampdown on the domestic tech sector, punitive lockdowns and rising geopolitical uncertainty the world over.

The latest figures from China’s State Administration of Foreign Exchange* (Safe) illustrate that foreign businesses are pulling out of China. According to Safe data, foreign direct investment (FDI) into the country turned net negative for the first time on record during the third quarter of this year, at –$11.8bn. This means that multinationals withdrew more capital from their businesses in China than they injected via equity investments, reinvested earnings and intra-company loans.

A two-year old story

As readers may have noticed, the story of falling FDI is something we have been chasing for a while. Yet, at first, teasing out the complexities of doing business in China was no easy task. Despite clear signals from our proprietary database fDi Markets that greenfield investments were dwindling in 2021, the foreign business community in China painted a different picture of what was happening on the ground. Generally, the comments I would get were: ‘this is a Covid-related blip; China’s economy is in its consolidation phase; we love it here’.

“The high growth in terms of FDI is behind us,” then president of the American Chamber of Commerce in Shanghai Ker Gibbs told me in 2021. “That’s not something sinister. It’s really just a reflection of the maturity of the market.”

I persevered nonetheless, betting that on top of the market maturity lurked more acute investor wariness. We ran a data story in mid-2021 about the country’s record low greenfield FDI. A feature in late 2021. A cover story at the beginning of 2022. All the while, public perception around the world towards China was souring, not least because of its Covid restrictions, while greenfield FDI continued to fall.

When the draconian lockdowns showed no signs of abating in China’s major cities in May 2022, senior members of the foreign business community became more vocal. As the then president of the EU chamber of commerce in China Jörg Wuttke told us in an interview: China is losing its “allure”.

Realigning priorities

By this point, it was validating to hear that the story I had been chasing — China’s slowing FDI — had set us on the right path.

That is not to say that investor wariness was to be taken for complete withdrawal. Of course, the notion that large-scale companies would ‘decouple’ from China was absurd, largely because it is a physical and financial impossibility for many multinationals to uproot their China-based operations. Think Apple or German industrials — how would they survive without China?

Even now, the latest Mofcom data does not augur a multinational exodus from China. Rather, it reflects a realignment of priorities — higher interest rates at home make repatriating earnings more attractive, while the slowdown of the Chinese economy and uncertainty over its property sector make investing in the country less attractive.

With raids on consultancies and a new espionage law, the anxieties of foreign businesses in China must still be high — just as high as Beijing’s national security concerns, which also show few signs of subsiding. Yet, as has been made clear by the Chinese government’s reduction of its negative list, which restricts foreign investor access to certain sectors, and its ambitions laid out in the latest Five-Year Plan, the country is still keen on FDI.

This is the message that Mr Xi went to San Francisco with: China remains an opportunity. After the whiplash felt by foreign investors and financial journalists alike, one thing seems certain: it will be difficult to reset the relationship between Beijing and the outside business world.

Seth O’Farrell is fDi's global investment reporter. You can reach him at seth.ofarrell@ft.com.   
*This article has been amended to reflect the data source of China's FDI deficit.

More on China's dwindling FDI:

• China's foreign investment problem
• China's national security concerns cap record FDI lows
• FDI into China hits new lows. What's next?

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