Foreign investments into China are accelerating despite global economic tensions and restrictions

July 22, 2021 12:45 PM
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REUTERS/Florence Lo

Global economic decoupling from China or, as some call it, reshoring, is not happening. Despite economic and financial tensions and a plethora of foreign restrictions on the transfer of technology to China, China continues to attract record amounts both of foreign direct investment and inflows of portfolio investment into listed onshore Chinese equities and Chinese government bonds. In short, despite the actions of foreign governments, in some critical dimensions China’s integration into the global economy continues to deepen.

As China continues to lead the global recovery from the adverse economic effects of the COVID-19 pandemic and the business environment for foreign firms in China continues to improve, foreign multinationals are doubling down on their investments in China, establishing thousands of new firms and expanding existing ones. Last year, as global foreign direct investment flows slumped by almost two-fifths, China’s inbound direct investment expanded by more than 10 percent to reach $212 billion. As a result, China’s share of global foreign direct investment in 2020 reached an all-time high of one quarter, almost twice its share in 2019.

This broad measure of foreign direct investment inflows includes new nonfinancial investment, reinvested profits of existing nonfinancial foreign affiliates, as well as foreign investment and reinvestment in financial institutions in China. The latter types of foreign direct investment inflows are growing rapidly, as China has liberalized financial regulations to allow majority or sole foreign ownership of securities, asset management, insurance, and other types of financial firms.

Foreign direct investment inflows continue to accelerate in 2021, reaching $98 billion in the first quarter, almost three times the inflows in the first quarter of 2020. Thus, China’s total direct investment inflows this year will almost certainly reach a new all-time high, and its share of global foreign direct investment is likely to rise further.

Portfolio inflows into China are also surging. Equity investors have purchased about $35 billion in Chinese onshore stocks so far this year, a pace 50 percent higher than in 2019. Foreign purchases of Chinese government bonds are even larger at $75 billion so far this year, but also running 50 percent higher than in 2019.

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Nicholas R. Lardy Senior Research Staff