This brief examines trends in PRC inward and outward investment as the Xi Jinping administration faces a dramatically slowing economy, COVID paralysis and a nosediving real estate sector.


Pandemic or no pandemic, inbound and outbound investment flows to and from the PRC have been strong with the greatest outbound activity taking place across Asia. Beijing is also further aligning its signature global venture, the Belt and Road Initiative, with domestic green and digital aspirations.

As for foreign direct investment, incentives within the PRC are guiding foreign firms to invest in the less-developed hinterland, namely in the areas of services and high-tech manufacturing. Moreover, special foreign trade zones are easing access to ever more sectors, while the new regional trade agreement, RCEP, is reducing tariffs, streamlining border measures and stimulating cross-border investment.

OFDI (outward bound direct investment) peaked at some US$200 bn annually in the mid-2010s. It fell short of US$70 bn in H1 2022, down 3.6 percent y-o-y while non-financial OFDI was up by a slight 0.6 percent according to preliminary estimates by MOFCOM (Ministry of Commerce), hitting US$54.2 billion.

A dramatic ebb and flow in investment volumes over the Xi Jinping era (2012–) reflect see-sawing domestic policy and unravelling economic fundamentals at home and abroad, obliging PRC firms to trim their sails. They had been encouraged to ‘go global’ from the early 2000s. Outward investment then stepped up further to compensate for the post-financial crisis drop in global demand. Another wave came with Xi Jinping’s BRI (Belt and Road initiative) from 2013.

chart 1: outward-bound investment peaks pre-COVID

source: Statistical Bulletin for China’s Outbound Foreign Direct Investment, MofCOM, NBS, SAFE

Yet, the PRC economy has failed to benefit from BRI as intended amid mounting concerns over financial risk and capital outflow. As a result, Beijing has ramped up scrutiny. Outward investment plummeted some 20 percent in 2017 following ‘clarification’ in rewarding, restricting or prohibiting OFDI. Vanity projects (entertainment, vineyards, etc.) were out; tech assets and ag investments were in. OFDI is forecast to settle around the current level. Return to pre-COVID highs (before early 2020) is unlikely, given COVID controls, rising protectionism and interlaced global and internal security concerns.

China Executive Briefing | Chinese Investment: Where to From Here?

September 27, 2022 — In this China Executive Briefing from Asia Society Australia, an expert panel examines Australia’s current policy settings for foreign investment, the most promising sectors for future Chinese investors, and other countries that can provide balance to Australia’s inbound investment profile. Participants include University of Sydney Professor Hans Hendrischke, FTI Consulting Managing Director Amanda Rasmussen, and Minter Ellison partner Bryn DavisJames Scullin, director of programs at Asia Society Australia, moderates the conversation. (52 min., 48 sec.)

2017 guiding opinions directing OFDI

encouraged industries➢ infrastructure projects conducive to BRI
➢ investments that promote high-quality development
➢ high tech and advanced manufacturing
➢ energy and raw materials
➢ agriculture and fisheries
➢ service sectors such as logistics
restricted industries➢ sited in jurisdictions with no diplomatic relations with the PRC or have other political ‘issues’
➢ real estate, hotels, cinemas, entertainment, sports clubs
➢ certain investment funds
➢ outdated manufacturing
➢ projects that fail to meet target country’s environmental or energy standards
prohibited industries➢ investments related to core military tech and national security
➢ gambling and adult industries
➢ other industries prohibited by treaties

Historically, according to Beijing-based CICC Research, PRC firms undertake foreign investment to satisfy four core needs:

  1. access to raw materials
  2. acquirement of new tech and promote innovation
  3. expansion of overall scale
  4. reduction in cross-border trade obstacles

Rising tensions are diverting investment to the Asia Pacific, away from North America and Europe. Security concerns among advanced economies drive greater investment scrutiny; Europe and the US have stepped up investment screening. While falling short of the all-out decoupling narrative, Beijing’s ‘dual circulation’ strategy calls for greater self-reliance and supply chain protection; shorter supply chains and more compliant partners.

Australia has seen a rapid decline in PRC investment, falling some 70 percent from just under US$2 bn in 2020 to US$600 million in 2021. Mining investment accounted for 70 percent of total inflows, but with Beijing eager to find alternate mineral sources, investment flows may fall further.

chart 2: eras of PRC overseas investment (%)

source: CICC

BRI strives to adapt

The Belt and Road Initiative launched in 2013. By this time, respected analysts at Peking University’s School of International Studies had conceived of a window for the PRC to kickstart global investment post financial crisis. They proposed that investment initiatives from the PRC could at the same time address domestic economic dilemmas of overcapacity and vanishing demand. Swiftly becoming part of Xi Jinping’s ‘new core foreign policy’, BRI now covers an array of projects with some 150 countries aligned with the PRC.

Ye Yu 叶玉 | Shanghai Institute for World Economy Studies

BRI lending is winding back, claims Ye, in a similar way to developed countries in the wake of the Great Financial Crisis of 2008. Yet rivalry in development finance has escalated with the launch of competing international programs as Build Back Better World, (a 2021 US answer to the BRI), and (the G7-repackaged version), Partnership for Global Infrastructure and Investment (the ability of both of these to fill the gap remains in question). Negotiating repayment between commercial lenders and PRC banks for defaulting nations will be pushed to the forefront and transparency is deemed a critical issue.

chart 3: BRI investment slows

source: AEI China Global Investment Tracker

As outlays have peaked, BRI investments are now on notice to include risk mitigation and better alignment with domestic policy (green development and the digital economy).

Cumulative BRI investment amounts to US$932 billion, with about US$561 billion in construction projects, and US$371 billion in non-financial projects, according to Green Finance Development Centre.

Often called out in international media for ‘debt-trap’ diplomacy, domestic policymakers acknowledge the debt issue. Xi Jinping has called for better early warning and greater risk assessment of overseas projects while the PBoC central bank has begun tightening overseas lending restrictions. Debt risks along the BRI are very real, found a study by US-based AidData, identifying 42 low and middle-income countries whose borrowings were costing over 10 percent of their respective GDPs.

And debt is growing harder to track. Most overseas lending during the pre-BRI era went to state institutions but has since focused on state-owned enterprises, joint ventures and private firms. Such loans do not show up on national balance sheets. As the global economy slows, debt issues, e.g. with Sri Lanka, become more apparent. AidData reports that PRC loans are shifting from funding projects to emergency ‘bailout’ loans. Despite the stumbles, BRI remains core foreign policy and is likely to continue to play a role in directing outward funding, however, other strategic initiatives may gain traction. In terms of putting PRC cash to work, Beijing is showing more interest in boosting digital trade than the bricks and mortar silk road.

going green

Xi Jinping has pledged that PRC carbon emissions will peak by 2030, foreshadowing carbon neutrality by 2060. This has spurred a domestic focus on environmental discipline and the focus has spread to overseas projects, where top-level guidance has gone green and Xi himself has called time on new overseas coal projects. His calls for policy support for green development have been echoed by voices from around the PRC policy community, notably by the presidents of both AIIB (Asian Infrastructure Investment Bank) and China Development Bank. The AIIB head has discouraged binary decisions between development and sustainability, and instead encouraged they overlap.

From July 2021 to March 2022, three guidance documents on the overseas conduct of PRC firms were issued. The most recent of these offered no metrics or targets, but laid out a timeline for a green BRI that will ‘be established by 2030’, along with the goal that environmental protection should ‘substantially improve by 2025’. This was the first move to formalise Xi’s ban on overseas coal projects. Read collectively, the three texts signal a shift from demanding that overseas firms follow local standards only, to now adding such international criteria as those of the Paris Climate Accords. Following the domestic push for greener development, greening BRI puts PRC firms in pole position to supply expanding markets, with PRC firms and outbound capital developing accordingly.

A platform for research and discussion of BRI sustainability, the BRIGC was set up following the second Belt and Road Forum in April 2019. Supervised by the Ministry of Ecology and Environment, it aims to promote consensus, understanding and cooperation for green development along the BRI. The coalition comprises over 130 domestic and international think tanks and organisations; its board includes a current Ministry of Ecology and Environment vice chair as well as two representatives from international organisations.

Belt and Road Initiative International Green Development Coalition (BRIGC)

digital silk road

BRI’s digital arm, the DSR (Digital Silk Road), harnesses the digital economy, e-commerce, IT infrastructure, smart cities and more. Mooted in 2014, it took off in 2017. It was highlighted by Xi Jinping in his address to the inaugural BRI Forum. Connectivity, cooperation, emerging tech and smart cities have all been promised across the digital economy.

Digital infrastructure gaps between BRI partners has become profitable as tech giants have long sought overseas expansion. As these firms stumble in developed markets and face monopoly investigators at home, the appeal of BRI beckons ever more.

DSR projects hence form a spectrum, from PRC-style development assistance to business-led market expansion. Huawei, for instance, has built data centres, while also connecting China and Pakistan via fibre-optic cable in 2018.

Now placed on the economics/policy frontier, the digital transformation of both the economy and trade is in need of globally unified rules, notes Zhou Mi 周密, MofCOM America and Oceania Research Centre. PRC engagement along the BRI can help the creation of these rules and standards, he adds.

The DSR has, however, been criticised of suspected backdoors left in the digital infrastructure it supplies, poor quality and for obliging partner countries to rely on PRC firms and funds.

Beijing’s new global initiatives

As competition with the West simmers away, Beijing is again playing its South-South cards. Two new frameworks—the Global Security and Global Development Initiatives—embody a shift from vaunting ‘China solutions’ to pursuing the Party’s own version of universalism. Beijing now talks less about the West fabricating universal values to serve its hegemonic agenda and weight has shifted to PRC-style modernisation, which is increasingly found in college textbooks and across Xi-era ideology as a whole.

Xi’s Global Security Initiative (GSI) is more a guiding philosophy that tacitly denies the legitimacy of the current world order while the Global Development Initiative (GDI) bids to widen Beijing’s global influence, proposing solutions for its own global discontents: inequality, food security, climate change. The GDI seeks to take an ever more active part in international organisations, formulating global standards, and promoting the BRI.

The PRC endeavours to assist the global South via tech transfer, infrastructure, investment, promoting industrialisation and digitisation, and offering development funds. Above all, the global South is presented with a framework that rewards them for holding US-led initiatives at arm’s length. Winning hearts and minds away from the US and its allies is of course nothing new: it was foundational to ‘global South’ policies of the Mao and Deng eras.

Tian Wenlin 田文林 | Renmin University

For Xi Jinping Thought pundit Tian, the rationale behind the GSI is that today’s global system is a ‘Western’ fabrication’ that can only increase instability. He claims its original sin and de facto failure is rooted in its assumed superiority, concealing the law of the jungle. For Tian, by proposing the GSI, Beijing offers a more ‘civilised’ order, manifesting peace, diversity and cooperation. It embodies Beijing’s claim to avoid a new Cold War.

boosting FDI vital to policy agenda

2009-21 actual FDI utilisation ($ bn) and yearly growth rate (%)

source: Ministry of Commerce

FDI (foreign direct investment) spurred rapid development of broad manufacturing chains during China’s reform era as PRC goods surged into global markets. Yet, the sector now suffers from overcapacity in labour-intensive and polluting industries. In the era of digital and green transformation, FDI is increasingly encouraged to drive markets towards quality over quantity.

During the pandemic cross-border investment contracted globally. However, China has remained world’s second largest FDI destination with total annual FDI inflows reaching C¥1.15 tn in 2021, 15 percent higher than in 2020 with over 30 percent going to high-tech sectors. As of H1 2022, total FDI utilisation has already exceeded C¥723 bn – up some 17 percent y-o-y.

chart 4: top 10 countries/regions for FDI, 2020 ($ bn)

source: Ministry of Commerce

Chart 4 shows that PRC figures reveal most investment coming from Hong Kong, long notorious for mainland companies listing overseas ‘round tripping’ funds—that is, transferring them overseas and bringing them back to take advantage of investment incentives. In 2021, one third of all FDI came from Hong Kong with the largest inbound deal so far in 2022 being in a semiconductor company via an investment consortium including Alibaba and Tencent. Conversely, investments from the US, South Korea and Japan have plateaued over recent years and are unlikely to pick up.

In line with Beijing’s emerging industry strategy, the 14th 5-year plan directs FDI to high-tech and R&D-intensive manufacturing and services. Incentives to attract fund to less-developed central and western regions aims to upgrade local infrastructure and foster manufacturing transfers from the coastal areas. Annual FDI growth in high-tech is about 20 percentage points above the recent PRC averages.

Multinationals based in China typically sell some 60 percent of their new products in local Chinese markets with the remainder exported internationally. However, supply chain disruptions have resulted in serious losses due to stubborn pandemic controls. Recent surveys conducted by local foreign chambers of commerce reveal eroded business confidence and frustration with border regulations, impeding in-country activities of executives and employees.

Some 25 percent of EU firms are contemplating moving their current or future investments out of China. US firms are concerned over US-China decoupling from critical manufacturing supply chains, meaning that some 50 percent of firms are opting to scale down their China-side operations. Firms that have their production and sales largely based in China may not find it easy to abandon the PRC market, at least in the short run.

The relocation of labour-intensive manufacturing, both domestic and foreign-funded, had in fact been in train prior to the pandemic, as firms sought cheaper labour and looked to avoid US/EU tariffs on made-in-China goods. This has allowed China to prioritise resources for boosting its own domestic advanced manufacturing and services. The extent of local industrial capability in the PRC has hitherto discouraged international high-tech investors from offshoring away from the PRC to less sophisticated industrial locations, such as Southeast and South Asia.

In the medium term, international firms will likely face greater competition from PRC counterparts, especially state-owned enterprises, but could benefit from further concessions and slowly easing pandemic restrictions. Beijing’s much-touted objective of self-sufficiency will likely be a process built upon both indigenous innovation and FDI-driven advancement.

Hardly a major source of FDI in China, Australian investors may find future openings in RCEP and special economic zones, such as the Greater Bay Area, Hainan FTP, and other FTZs should Australia-China diplomatic relations improve.

14th 5-year FDI plan

A recent MOFCOM sectoral 5-year plan on attracting foreign investment highlighted the major FDI objectives of:

  • luring more FDI into high-tech sectors
    • e.g. integrated circuits, digital economy, new materials, biopharma, high-end equipment and modern logistics
  • shortening the FDI market access negative list
    • further opening the manufacturing, services and ag sectors
  • balancing regional spread of FDI
    • directing more to local central, west and north-east industries
  • diversifying global FDI sources
    • seeking more from Hong Kong, Macao and Taiwan in attracting FDI
  • granting more reform autonomy to FTZs and Hainan FTP
  • reinforcing FDI monitoring and security reviews

A special measures list for managing market access further cut restricted sectors from 33  to 31, allowing greater access to the services sector in Free Trade Zones (FTZs). Relaxing FDI restrictions in telecoms, Beijing is welcoming wholly foreign-funded telecoms firms, and encouraging FDI in adult vocational education and skills training.

Yet security-related sectors, such as IT services, rare earth mining and scientific research remain closed to FDI. A new ban on foreign and private investment in the media sector including newspaper publications, radio and television broadcasting and film production also took effect in 2022.

In late 2021, an FTZ version of the 2021 negative list also appeared, allowing full market access for international firms in manufacturing, with just 27 restrictions. Previous barriers in auto manufacturing, such as caps on foreign shareholding and the number of joint ventures owned by a single firm, were eliminated.

chart 5: 2020 manufacturing and scitech top FDI by industry (%)

source: Ministry of Commerce

developing the hinterland

This year a draft industry catalogue encouraging FDI was issued, which added 238 new entries, 188 of which reward investment in Central and Western China. This highlights Beijing’s strategy to redirect labour-intensive industries from the coast to the hinterland, where localities are keen to attract high-tech manufacturing and strategic emerging industries, such as big data, biopharma, NEVs and integrated circuits.

According to a recent survey published by the China Trade Promotion Association, 11.2 percent of foreign firms stepped up their investment of central and western regions. In particular, the west was the top FDI choice in 2021 with a total of $3.36 bn, up 32 percent y-o-y and some 12 percentage points above the national average. High-tech investment grew some 25 percent to 36 percent of the total and high-tech manufacturing investment doubled in 2021. The largest FDI project was a $500 million investment contract from Albemarle Corporation (US) for lithium battery material factories in Meishan, Sichuan.

table 1: 2020 FDI utilisation by region

regionactual FDI utilisation ($ bn)%newly registered foreign firms%

source: MofCOM

Outdated infrastructure and frayed logistics have traditionally deterred many international players from venturing inland. Improvement is likely in coming years with measures issued to improve infrastructure, multimodal transport and inter-regional circulation. A national road network plan, released by the NDRC in July 2022, allocates over half of new road building to the west. A north-south artery will span Xinjiang, Qinghai, Sichuan, Yunnan and Tibet, and link up with Southeast Asia.

industry catalogue encouraging FDI

Launched in 1995 as the ‘FDI Industrial Guidance Catalogue’, the current catalogue lists preferential measures, such as tariff exemptions for imported equipment and prioritised land supply for international investors. Entries targeting the central and western region highlight local industrial competitiveness and resource advantages. The 2022 catalogue
encourages FDI in:

  • farming, forestry, animal husbandry and fisheries
  • mining
  • manufacturing
  • electricity, heat, gas and water production and supply
  • transport, storage and postal services
  • wholesale and retail
  • information transmission, software and technology services
  • rental and business services
  • scientific research and product development services
  • water conservancy, environment and public facilities management
  • education
  • public health and social work
  • culture, sports and entertainment

Special FTZs and Hainan Free Trade Port

FTZs and special demo zones that enjoy preferential treatment and have long been favoured to attract FDI.

Created in June 2020, the Hainan FTP (free trade port) is to spearhead a revitalised trade and investment push. Several pillar industries aspire to become FDI targets: tourism, services, high-tech, tropical agriculture, and high-end manufacturing. Reliance on real estate—should it not die a natural death in the meantime—will be reduced.

Sales tax reform is to go onto the front foot, making ready for Hainan’s independent customs zone coming online in 2025. Currently, customs duty, import value-added tax and consumption tax are all levied on imports to Hainan, but the latter two will be reduced via merging taxes and improving collection.

The generous tax breaks afforded to Hainan entail the risk of the island becoming a tax haven. Corporate headquarters must exclusively operate in Hainan to be applicable for the 15 percent enterprise income tax preferential policy, stipulates Feng Fei 冯飞, the Governor of Hainan.

Launched on 1 January 2022, RCEP (the Regional and Comprehensive Economic Partnership), promotes Hainan’s ties with ASEAN states, leveraging its proximity to become a regional trade and investment hub. From January to May 2022, trade with RCEP members accounted for 21.64 percent of Hainan’s total services trade, primarily in travel, transport, commercial, computer, manufacturing and IP.

looking ahead: RCEP

RCEP is predicted to attract greater cross-border investment and link regional supply chains. Its ‘rules of origin’ criteria will help goods, not least intermediary products, flow freely in the region, trimming trade costs for PRC textiles and garments, light manufacturing, electronic equipment and ag products. The cost of importing high-end machine manufacturing materials from Japan and South Korea, including steel and other critical components, will also fall.

Under RCEP’s inclusive market access provisions, PRC service sectors will further open to the investment from member states in such sectors as finance, telecoms, consulting and R&D. Globally competitive IP protection is intended to attract high-quality FDI into knowledge-intensive sectors. Unified digital commerce rules could create opportunities for international e-commerce platforms.

But RCEP rates poorly against high standard regional agreements, such as the  CPTPP (the Comprehensive and Progressive Trans-Pacific Trade Partnership) in its neglect of such issues as SOEs, labour and environmental standards.

Meanwhile, offshoring manufacturing to ASEAN is now seen as highly contentious. Despite recent supply chain disruptions, the appeal of China’s comprehensive supply chains simply outweighs cheaper labour costs offshore in the eyes of foreign investors.

RCEP: local wins

  • Shandong province’s import of critical engine components from Japan will benefit from tariff reductions
  • domestic textile firms’ garment factories in Southeast Asian countries can purchase raw cloth made in the PRC, deemed local materials under RCEP’s rules of origin (for PRC firms, this can integrate their domestic and international supply chains, and improve product quality)
  • Ningxia province’s labour-intensive industry will step up its relocation to ASEAN countries under RCEP chasing cheaper labour costs, while industries like biopharma, modern farming and new materials could attract more investment from Japan and South Korea
  • Southeast Asia is a prime destination for traditional Chinese medicine exports. More investment is called for in R&D cooperation with Singapore, Indonesia, the Philippines and Thailand, though regulatory and cultural hurdles may make progress slow

“Unlike the US-initiated TPP (the predecessor of CPTPP), RCEP is based on inclusive principles, promoting free trade and joint development. Its rules currently focus on traditional trade and investment but its rollout encourages progress toward providing Asia-Pacific trade with institutional support. Four decades and more since China’s period of reform and opening up, PRC manufacturers continue to rule at the middle and lower end of global supply chains. Beijing should now deepen external opening, consolidating PRC producers’ standings in low-end global supply chains while investing more in R&D to develop more high-end products. The US precedent of weaponising supply chains must be shunned.”

Zheng Yongnian 郑永年 | Chinese University of Hong Kong (Shenzhen)

investment outlook

The policy-induced drop in outward investment post-2016 is the new normal. Weakness in the domestic economy (exacerbated by a plunging real-estate market and paralysis in managing COVID) coupled with unprecedented global crises is refocusing Beijing’s priorities. Supporting domestic employment and boosting green and high-tech sectors will require massive funds, and as growth continues to slow, firms will be on notice to invest at home.

The PRC aspires to be a self-sufficient economy, vigorously developing sectors otherwise at the whim of ‘hostile foreign forces’. Honing in on those like chip foundries, China strives to end dependence on foreign suppliers. Nonetheless, engagement with global investment, trade and governance on which its future prosperity depends is imperative. But this is now, at least in principle, on its own terms.

Outward investment, albeit subdued, will continue. Echoing Japan in the 1980s, as domestic demand fails to mature, PRC firms will continue to develop new markets abroad. EV maker Nio will open its first European plant this September. Accessing new tech and resources will continue to necessitate investment outflows.

The strong growth of inbound FDI in the past two years can be traced back to the PRC’s speedy recovery from the pandemic when most of the world was still in lockdown. This was catalysed by opening FDI market access and lower investment costs.

But Party-led insistence on zero-COVID has dealt high-cost damage to domestic supply chains, prompting multinationals (and domestic firms) to reconsider their long-term commitments to production and future investment within the PRC.

Relocation is so far taking place at a moderate scale only: foreign firms for the most part remain drawn to the huge PRC market and its sophisticated domestic industrial chains, above all in manufacturing sectors like auto, chemicals and biopharma. A critical input to local high-end industrial growth, FDI will continue to get red carpet treatment from PRC policymakers with tempting incentives offered in FTZs and Hainan FTP.

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