China Economy and Foreign Investment in 2024: Positive Signals amidst Heavy Challenges

18.06.2024

In April, China released its economic data for the first quarter of 2024, sending positive signals of an improving economic landscape. Moreover, the Chinese government indicated the easing of regulations for foreign businesses seeking to invest in China. What does China’s economic outlook and investment signaling imply for international businesses in China for the second half of 2024 and what are the remaining challenges?

Summary: China’s economy and foreign investment in 2024

  • China sends positive signals regarding the Chinese economy and actively seeks to attract foreign investment.
  • Both the State Council’s Action Plan as well as the Provisions on Facilitating and Regulating Cross-Border Data Flow by the Cyberspace Administration of China will relieve some of the pressure international enterprises in China are facing.
  • China faces a series of domestic socio-economic challenges ranging from local debt, the property crisis to youth unemployment, jeopardizing economic recovery and foreign investors’ trust.
  • National security remains a focus of the government’s agenda and will continue to create challenges in international cooperation.

China’s economic data for 2024

China’s economy seems to be on its way to recovery. With China’s GDP having grown 5.3% in the first quarter of 2024, beating the predicted 4.9%, Chinese media and officials are conveying optimism regarding the country’s economic recovery.

Taking a closer look at the numbers, however, it becomes clear that challenges remain. Major sectors of China’s GDP growth can be attributed to the growth in both the industry and manufacturing sectors as well as the services sector.

These growing numbers have been especially driven by the electronic vehicle sector, solar panels and battery-production. This sends alarm signals, however, towards the US and EU, fearing impacts on their respective domestic industries. Both German chancellor Olaf Scholz as well as Janet Yellen, US Treasury Secretary, addressed fears of Chinese overcapacity flooding the global markets on their recent visits to China. The EU has been discussing tariffs on electronic vehicles, which China calls “unreasonable.”

Domestic demand in China remains an issue however, with retail sales only rising 3.1% year-on-year in March. Chinese consumers remain cautious. Foreign companies in China such as Apple also reported weaker sales.

Chinese Foreign Direct Investment: Lack of investors’ confidence

Foreign Direct Investment in China has been plummeting even in the first months of 2024, down 19.9% in comparison with the year before. What’s more, foreign direct investment shrank to its lowest level in 30 years in 2023. China has been fighting with a struggling post-Covid-19 economy, high unemployment rates, especially among young Chinese, the property crisis, high local debt, and weak domestic consumer demand. All this affects possible investors’ confidence.

But there are more reasons for the decreased investment in China. The Chinese government has set an increasing focus on national security. In 2023, a revised espionage law led to further caution of international businesses operating in China. The cautions were not unjustified, as crackdowns against foreign companies on espionage and national security grounds show. Adding to economic issues the country is faced with domestically, the continued securitization of the Chinese economy adds to the vigilance of possible foreign investors.

China regulations: (Any) good news for foreign businesses in China?

China has, however, been sending positive signals toward foreign businesses. In January 2024, the Chinese government eased rules on revenue requirements for companies seeking joint ventures in China.

Guo Tingting, Chinese Vice Minister of Commerce, furthermore pledged to grant more equal treatment for foreign businesses in China. Many companies have lamented difficult market access to the country. A survey conducted by the German Chamber of Commerce (AHK) in the early months of 2024 showed that two-thirds of the surveyed German businesses in China see themselves exposed to “unfair competition.” Foreign companies withdrawing from China could, however, cause serious harm to the Chinese economy in the long term.

Aware of this, the Chinese government has recently published an action plan including 24 measures to bolster foreign investment and updated their rules on data exports. These relaxations aim to attract more foreign investment to China and seek to create a more welcoming atmosphere for foreign companies.

Furthermore, in March 2024 the Cybersecurity Administration of China (CAC) published a series of relaxations regarding cross-border data transfers . These “Provisions on Facilitating and Regulating Cross-Border Data Flows” are aimed at foreign companies in China to facilitate easier transfer of data across borders.

China regulations on foreign investment: Action Plan to attract foreign investment

In February 2024, China’s State Council issued an action plan including 24 measures for high-level opening up to attract and utilize foreign investment. The measures are not only aimed at possible future foreign investment, but also targeted to already on-site foreign-invested enterprises. The action-plan covers five major areas:

  1. Expand market access, liberalize foreign investment: the measures include shortening the negative list for foreign investment and granting foreign businesses wider access to the field of scientific and technological innovation in free trade zones. The measures also seek to expand the access of foreign financial institutions in banking and insurance, as well as access to the domestic bond market and the implementation of pilot projects for encouraging foreign partners to invest in the establishment of private equity funds.
  2. Increase intensity of policies to attract foreign investors: the action plan calls to expand the “national catalog of industries” that encourage foreign investment in areas such as advanced manufacturing, high-tech, energy conservation and environmental protection. Policies on tax and financial support are to be implemented. Focus lies also on the promotion of more sustainable green energy utilization. It furthermore encourages China’s central, western, and north-eastern regions to attract enterprises in key development zones.
  3. Ensure fair competition and offer “good services” to foreign invested enterprises: the measures call to act against policies that violate fair competition and unified markets. The State Council calls on fair participation in standardization processes for foreign-invested companies in China, improving the bidding system as well as administrative law enforcement and the provision of services for foreign enterprises. The measures call for building the “Invest in China” brand by combining “going out” and “inviting in” strategies and promoting investment.
  4. Promote innovation cooperation between foreign-funded and Chinese enterprises: the action plan already addresses the relaxation of cross-border data flows. It moreover calls on easier access to visa and work and residence permits for international business personnel. The State Council promotes cooperation of foreign and Chinese entities in technology and science institutions.
  5. Align domestic regulations with international standards in trade: These measures include the alignment of intellectual property rules with international standards, as well as the promotion of more trade agreements and a more general call to adhere to international standards in trade.

With this plan, China not only seeks to react to criticism of foreign companies regarding unlevel playing fields and a challenging business environment, but also aims to increase the attractiveness of specific locations, such as the central and western regions of the country. It remains to be seen what the actual outcomes of the plan will look like.

Foreign investment in China: A mixed bag

China sends positive signals to international companies and actively seeks to liberalize and open its market. Whether the growth of the Chinese economy in the beginning of2024 can add momentum to the trend and attract more foreign investment is to be seen in the second half of this year. However, both domestic socio-economic concerns as well as international challenges remain, and might take its toll on the recovery.

Chinas Action Plan to Attract Foreign Investment
Anmelden