Foreign business investments in China fell to a three-decade low in 2023, a sign that global commerce is wary of doing business with the country amid Beijing’s restrictive and volatile policy environment, as well as its mounting geopolitical tensions with Washington.

Data released on Sunday (Feb. 18) by China’s State Administration of Foreign Exchange showed that foreign businesses’ direct investments into the country totaled $33 billion last year, down over 90% from a peak in 2021, and the lowest since 1993.

In the fourth quarter of 2023, FDI inflows to China exceeded outflows by $17.5 billion. This follows the previous three-month period’s first-ever quarterly deficit in direct investment liabilities of $11.8 billion.

“In the short and medium term, multiple measures should be taken to attract foreign direct investment,” argued Chen Yinmo and Zhang Ming (link in Chinese) of the Chinese Academy of Social Sciences in a December article on how to respond to falling FDI. “In the long run, China’s economic growth will need to rely more on [domestic markets] as the main driver.”

“China’s slowdown and challenges for foreign investors… no doubt played a role,” noted Bert Hofman, an adjunct professor at the National University of Singapore. He added that other factors include a fall in invested retained earnings — foreign firms’ China-based earnings that are kept in the country — due to higher interest rates in the U.S. and Europe; as well as a drop in overseas IPOs as Chinese companies turn to domestic listings instead.

Difficult domestic conditions

An increasingly difficult and unpredictable business environment in China is part of the reason for the collapse in foreign firms’ investments and operations in the country.

Beijing has been cracking down on business consultancies that provide crucial insight and data to inform foreign companies’ investment decisions. Meanwhile, an updated counterespionage law means even mundane business activities could be seen as endangering national security, thereby dramatically raising the threat for international firms operating in China. Hong Kong — where many foreign corporations base their regional headquarters — is similarly moving to expand its definition of “state secrets,” aiming to criminalize the sharing of information on economic and technological development that “would likely endanger national security” if unlawfully disclosed.

Geopolitical headwinds

Intensifying geopolitical tensions between China and the west are making foreign businesses think twice about investing in China. Both the U.S. and Europe’s expanding web of export controls, sanctions, and outbound investment restrictions targeted at Beijing are raising the costs and risks of doing business in China.

Meanwhile, the west’s push toward reducing reliance on China means that companies are shrinking their China footprints and shifting operations elsewhere, including Southeast Asia and Latin America. Running parallel to this are Washington and Brussel’s efforts to rebuild their own domestic supply chains and industrial bases, further drawing away investment that may otherwise have been directed to China.

“It is very difficult and not optimistic for foreign investment [in China] to return to the average level of the past decade,” Tao Wang, chief China economist at UBS, said at a forum in November (pdf). “It would be very good to even return to half of the level of the past 10 years.”