China's Investment Strategies: Decision-Making Factors And Motivations

China is the second-largest recipient of foreign direct investment (FDI) in the world. In 2023, FDI in China fell to $163 billion, a 13.7% drop from the previous year.

China's economy is going through a period of difficulty, with a declining growth rate, rising unemployment, and a burst property bubble. The country is also keeping interest rates low, while rates in the US remain high. These factors tell foreign investors that now is not a good time to invest in China.

There are also political factors at play. The Chinese Communist Party (CCP) under Xi Jinping has continued to tighten its control over the population and the economy, including Western investors. Companies are being raided, and employees are being detained. The CCP is more interested in control than growth, and this has influenced foreign investment. China has also been trying to close and harass companies that undertake due diligence services for foreign investors.

China's relationship with Russia has also contributed to investor concerns. The country's economic relationship with Moscow has deepened since the war in Ukraine began, with Russian energy sales to China increasing.

Other factors that influence FDI in China include the availability of capital, the regulatory environment, political and economic stability, the local market and business climate, and openness to regional and international trade.

Economic factors

China's economic factors play a crucial role in its investment decisions, with the country focusing on both domestic and international investments to stimulate economic growth and development. Here are some key economic considerations that influence China's investment strategies:

• Foreign Direct Investment (FDI): China has historically been a significant recipient of FDI, which contributes to its economic growth. However, there has been a recent decline in inbound FDI due to factors such as the COVID-19 pandemic, policy unpredictability, and geopolitical tensions.
• Domestic Investment: China prioritizes domestic investment to strengthen its economy and promote self-reliance, especially in critical sectors like technology, manufacturing, and supply chains.
• Belt and Road Initiative (BRI): Through the BRI, China has invested heavily in infrastructure projects globally, including transportation, energy, and telecommunications. While this has expanded China's influence, it has also led to concerns about unsustainable debt, labor issues, and environmental degradation in recipient countries.
• Trade and Export: China's trade policies play a vital role in its investment decisions, with a focus on increasing exports and reducing trade deficits. China's manufacturing and production capabilities make it a key player in global trade.
• Economic Growth: China's rapid economic growth has made it an attractive investment destination, with a growing GDP and urbanization driving investment opportunities.
• Market Access: China offers market access to foreign investors, particularly in specific sectors like renewable energy, finance, and technology. However, there are still restrictions and regulatory challenges that foreign investors need to navigate.
• State-Owned Enterprises (SOEs): The Chinese government has a strong influence on SOEs, which make up a significant portion of the country's economic output. These enterprises often receive preferential treatment, access to essential resources, and support from the government.
• Financial Regulations: China's financial regulations, such as interest rates, capital controls, and monetary policies, impact investment decisions. The country's central bank, the People's Bank of China (PBOC), plays a crucial role in guiding these policies.
• Exchange Rates and Currency Risks: China's exchange rate regime and fluctuations in currency values can impact investment decisions, particularly when investing in companies that earn profits in other currencies.
• Debt and Capital Outflow: China has implemented measures to manage significant capital outflows and debt pressures, including restrictions on outbound investments and the establishment of "encouraged" and "prohibited" investment categories.

Political factors

The Chinese Communist Party (CCP) under Xi Jinping has tightened its control over the population and the economy, including foreign investors. This has directly impacted foreign investment due to China's efforts to close and harass companies that provide due diligence services for foreign investors. Chinese authorities seem more concerned about preventing the flow of information to foreign sources, which has backfired as investors turn away, unable to obtain the data needed for investment decisions. This indicates a shift in focus from economic growth to control, which has influenced foreign investment.

China's political relationship with its trading partners is a key factor in bilateral trade flows. Warmer relations generally lead to larger increases in trade, while cooler relations have the opposite effect. Political stability and strong leadership in a host country are attractive to Chinese investors, as they perceive these factors as providing a more predictable and secure environment for their investments. However, there is a risk of investing in countries with strong leaders who later turn out to be weak and unable to protect Chinese firms from opposition elites and civil society organizations, leading to project cancellations.

China's investment decisions are also influenced by its desire to address domestic economic problems by exporting its way out of them. This strategy has been employed repeatedly but may catch up with them as more countries, besides the United States, become wary of China's overcapacity in manufactured goods. China's investment behavior is shaped by its experience with provincial Chinese leaders who can provide strong leadership and protect business interests. This preference for working with strong leaders who can ensure political stability and policy predictability makes China vulnerable to pushback from these leaders, who may use their indispensability to pursue policies contrary to China's interests.

China's Belt and Road Initiative (BRI) has expanded its global influence and posed significant challenges to the economic, political, and security interests of the United States. While BRI projects can have positive economic impacts and address critical infrastructure needs in developing countries, they have also contributed to unsustainable debt, labor issues, and environmental degradation. Chinese-funded projects often do not create local employment opportunities or share knowledge about infrastructure development with recipient countries. Additionally, China is the world's largest source of financing for coal-fired power plants, which has negative environmental and social impacts.

Foreign investment restrictions

China is the world's largest investor in other countries, providing funding for infrastructure, energy, and telecommunications projects. However, the country has been criticised for its foreign investment practices, which have been described as lacking transparency and contributing to unsustainable debt, labour issues, and environmental degradation.

Restrictions on Foreign Investment in China

China has been described as having a restrictive approach to foreign investment, with numerous sectors closed off to FDI. The country has been ranked 11th out of 89 countries in the OECD FDI restrictiveness index.

Regulatory and Legal Complexities

China's regulatory and legal environment has been described as complex and unpredictable. Foreign investors have reported concerns about regulatory transparency and uncertainty, as well as the lack of a clear distinction between the Chinese Communist Party (CCP) and the government, which can influence businesses and courts.

Data Restrictions

China has introduced new restrictions on sharing economic and commercial data with foreigners. This has made it difficult for foreign investors to obtain the information needed to make investment decisions.

National Security and Espionage Laws

China's national security laws and counter-espionage laws have been a cause for concern for foreign investors. These laws broadly define national security and espionage and have been used to pressure economists and analysts to limit negative comments about the economy and restrict the activities of foreign consultancies.

Technology Transfer and Intellectual Property Rights

China has been criticised for its approach to technology transfer and intellectual property rights. While the country has officially banned forced technology transfers, foreign investors have reported that technology cooperation is encouraged, and local partners are often required for clinical trials and other projects, which can lead to technology transfer.

Ownership Restrictions and Joint Ventures

China imposes foreign ownership caps and requires joint ventures with local firms in certain sectors. This can limit foreign control and influence over businesses operating in China.

Encouraged and Restricted Sectors

The Chinese government has identified specific sectors that are encouraged or restricted for foreign investment.

Encouraged sectors include:

• High technology
• Production of new materials
• Service sector
• Recycling and renewable energy

Restricted sectors include:

• Military and defense-related industries
• Critical infrastructure (energy, transportation, telecommunications)
• Cultural and heritage preservation
• Media and publishing
• Education
• Film production and distribution
• Tobacco products

The Belt and Road Initiative

The BRI is considered a centerpiece of Xi Jinping's foreign policy and is incorporated into the constitution of the Chinese Communist Party (CCP) in 2017. The initiative forms a central component of Xi's "Major Country Diplomacy" strategy, which calls for China to assume a greater leadership role in global affairs in accordance with its rising power and status. The BRI aims to enhance regional connectivity and embrace a brighter future by constructing a unified large market and making full use of both international and domestic markets.

The BRI has been criticized for human rights violations, environmental impact, and concerns of debt-trap diplomacy resulting in neocolonialism and economic imperialism. However, supporters praise the initiative for its potential to boost global GDP, particularly in developing countries.

The BRI presents risks common to many major infrastructure projects, including debt risks, governance risks (corruption and procurement), stranded infrastructure, environmental risks, and social risks. To succeed, the BRI requires deeper policy reforms that increase transparency, expand trade, improve debt sustainability, and mitigate environmental, social, and corruption risks.

The initiative is largely treated with suspicion in the US and its major allies, characterized as debt trap diplomacy and a predatory, opaque enterprise that threatens Western interests. In response, the US, Japan, and Australia formed a counter-initiative, the Blue Dot Network, in 2019.

Despite the criticism and concerns, the BRI has attracted endorsements from over 130 countries, including the United Nations Secretary-General António Guterres, who described the initiative as capable of accelerating the UN Sustainable Development Goals.

China's economic relationship with Russia

China and Russia's economic relationship is multifaceted, encompassing trade, investment, and labour migration. While trade predominates, the two countries are also significant sources of foreign direct investment (FDI) for each other.

Trade

Trade between China and Russia has been increasing since the normalisation of relations between the two countries in 1989, with the overall trade volume increasing by more than four times. The composition of this trade has changed over the past 15 years, with intermediate industrial products such as metals, chemicals, fuels, and timber now forming the largest component of Russian exports to China. This is based on Russia's wealth of natural resources. Chinese exports to Russia, on the other hand, consist largely of consumer goods such as clothing, finished leather goods, and footwear.

Russia is a major source of oil, gas, coal, and agricultural commodities for China, with exports of Russian oil and gas to China steadily increasing. Russia is China's second-biggest oil supplier after Saudi Arabia, with volumes averaging 1.59 million barrels per day in 2021, or 15.5% of Chinese imports. Russia is also Beijing's third-largest gas supplier, exporting 16.5 billion cubic meters of gas to China in 2021, meeting about 5% of Chinese demand. Russia was also China's second-largest coal supplier in 2021.

In addition to energy and commodities, Russia's food trade with China is small but expanding. Soybean exports to China stood at 543,058 tonnes in 2021 and are expected to reach 3.7 million tonnes by 2024. China also approved beef and wheat imports from Russia in 2021. Other food exports from Russia to China include fish, sunflower oil, rapeseed oil, poultry, wheat flour, and chocolate.

China, on the other hand, sells mechanical products, machinery, transport equipment, mobile phones, cars, and consumer products to Russia. Chinese exports to Russia stood at $67.6 billion in 2021, up 34%.

Investment

Bilateral investment flows between China and Russia are beginning to grow, with levels of FDI between the two countries currently low in absolute terms. However, in relative terms, China is an important destination for outward Russian FDI, accounting for around one-fifth of the total. Russia is also a relatively important destination for Chinese outward FDI, accounting for around one-quarter of the total.

Western sanctions have forced Russia to look towards China for investment opportunities in recent years, particularly in infrastructure, oil, and gas projects under China's Belt and Road Initiative. Chinese state banks have provided significant financing for these projects, with Russia being Beijing's largest recipient of state sector financing. Between 2000 and 2017, Russia secured 107 loans and export credits worth $125 billion from Chinese state institutions.

Labour Migration

There has been a small amount of labour migration from China to Russia's Far East, but it is believed that the lack of economic advantage for Chinese migrants in this region will prevent migration from increasing significantly.

Overall Economic Relationship

While China and Russia's economic relationship is growing, it is constrained by geographical factors such as the great distances and poor transportation networks between the two countries' major population and industrial centres. Additionally, the Russian government's recent decision to direct a proposed oil pipeline in the Russian Far East towards a Russian port rather than directly into China may indicate a desire to maintain a level of independence from China. Nevertheless, as China and Russia's economic connections strengthen, their partnership will become even more unequal, with China's sheer mass, proximity, and willingness to economically coerce its partners giving it the upper hand.

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