By Nishant Maddineni
Foreign direct investment (FDI) in China experienced an increase of 1.7 percent in 2014 to reach US$119.56 billion. While the rise in itself is not noteworthy, the direction of investment is significant. Changes to FDI trends over the course of last year reflect alterations in not only China’s economy, but also in where opportunities in the country can currently be found. These changes can be broken down by sector, country of origin, and region of destination.
Investment by Sector
The best performing sector in 2014 was the service sector, which saw investment grow 7.8 percent year-on-year to become US$66.24 billion. This starkly contrasts with the performance of the manufacturing sector, which saw foreign investment fall 12.3 percent to US$39.94 billion. Investment in the agricultural sector has always been low and decreased by 15.4 percent to US$1.52 billion.
Increased service sector investment follows the government’s stated goal of using it to buoy foreign trade and restructure China’s economy. Chinese officials have promised greater openness in the service sector to foreign companies, partially in the hope of helping its own service providers.
When speaking at the 18th China International Fair for Investment and Trade, China’s Vice Premier Wang Yang said that: “To introduce foreign investment is not only to introduce the capital, but more importantly, to introduce advanced technology, management experience and talent resources, learn from mature markets and establish an economic system or mechanism compatible with international rules.” He also said China will steadily open up its finance, education, healthcare and culture sectors.
Reforms made this year to help open up the service sector include the granting of more autonomy in the Shanghai Free Trade Zone (FTZ), such as in banking, insurance, construction, logistics, education and health and e-commerce. An example of these reforms is the existence of wholly owned foreign hospitals in Mainland China. This was originally started in the Shanghai FTZ but was implemented last July in four provinces (Jiangsu, Fujian, Guangdong and Hainan) and three municipalities (Beijing, Shanghai and Tianjin).
Investment by Region
While the Eastern Coast of China continued to be the biggest destination for foreign investment, 2014 showed the largest increases further inland in Central China. This reflects the Chinese government’s target of increasing development in the poorer regions of the country and reducing inequality. Foreign investment was up 1.1 percent in Eastern China to US$97.92 billion, up 1.6 percent in Western China to US$10.78 billion, and up 7.5 percent in Central China to US$10.86 billion.
Former Premier Wen Jiabao implemented the “Rise of Central China Plan” (RCCP) in 2004. Its goal was to accelerate the development of China’s central regions covering six provinces: Shanxi, Hunan, Hubei, Anhui, Henan, and Jiangxi. These provinces’ strategic location in the heart of the country was seen as playing a vital role in linking the wealth of the eastern region with the lesser developed but resource-rich western region.
Within the RCCP, strong emphasis was placed on making use of foreign capital and absorbing FDI. Part of this was offering incentives to foreign companies, including targeted tax exemptions and preferential land-use policies through discounted fees. Chinese policies also improved foreign investors’ access to commercial and financial services, activities contributing to environmental protection, and advanced manufacturing.
As the government aims to steer the economy away from exports and more towards domestic consumption, Central China – which takes up more than one-fourth of the nation’s total population – will provide the country with a large and rising consumer market. However, the most important factor in increasing investment is probably the rising cost of labor in China’s coastal regions, which has led foreign companies to find new opportunities in the country’s interior.
Investment by Country of Origin
The vast majority of FDI in China in 2014 came from a handful of countries: the top 10 invested US$112.59 billion, which is 94.2 percent of national total foreign investment. These 10 countries, in order of decreasing investment, are Hong Kong, Singapore, Taiwan, Japan, South Korea, U.S., Germany, U.K., France, and the Netherlands.
One of the biggest increases in FDI came from South Korea, which saw a hike of 29.8 percent to reach US$3.97 billion. South Korea’s accelerated investment into China can be attributed to improving diplomatic ties, including expectations of a bilateral free trade agreement (FTA). Negotiations for the FTA concluded last November and China’s Ministry of Commerce has said the agreement will be signed in 2015 and will take effect in the second half of this year. 90 percent of South Korea’s FDI is in manufacturing. However, there was also growth from the wholesale/retail sector, which grew over 55 percent partly due to popularity of Korean pop culture.
Japanese investment in China, however, fell 38.8 percent to US$4.33 billion. Many Japanese firms, in contrast with South Korean companies, have scaled back investment as territorial disputes between Beijing and Tokyo led to high profile political discord between the two countries. In addition, the depreciation of the Japanese yen made it difficult for Japanese companies to keep up and expand operations. The drop was the largest since 1989.
In Europe, British investment increased by 28 percent to US$1.35 billion. A study by law firm King & Wood Mallesons stated that it expected British investment in China to increase to £26 billion by 2020. The U.K. is the second largest European investor in China after Germany. The European Union as a whole invested US$6.85 billion, which was a 5.3 percent decrease on 2013.
Investment from the U.S. fell 20.6 percent to US$2.66 billion. The decrease may be due to weariness over antitrust investigations that the Chinese government has been conducting into foreign companies, including blue chips like Microsoft and Qualcomm. U.S. Treasury Secretary Jacob J. Lew said in a missive to Vice Premier Wang Yang that the probes could have implications for relations between the two countries. Also, in a survey last year from the American Chamber of Commerce, 60 percent of company respondents said they felt less welcome than a year before, compared to 41 percent in 2013.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
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