Worse ties, competition will drive down China FDI
Foreign direct investment (FDI) into China this year will fall for a second year because of worsening ties with the United States and Europe and increasingly difficult conditions for foreign companies.
In 2024, FDI fell 27.1 per cent in yuan terms, the sharpest decline since the 2008 global financial crisis. In the first quarter of 2025, it fell 10.8 per cent from the same period last year to US$36.9 billion.
A survey of 162 members by the European Union Chamber of Commerce in China published in May found 59 per cent of respondents saying that business had become more difficult this year.
Half said China’s tariffs on U.S. goods were a problem, 64 per cent expect intensified competition and 58 per cent were concerned about future profitability.
Chairman Jens Eskelund said trade tensions would lead to lower efficiency and firms were postponing decisions because of the increasing uncertainty.
Like Chinese firms, foreign companies are trapped in the middle of worsening economic relations between Beijing, Washington and the European Union. No-one knows the final level of tariffs on goods going from China to the U.S. and vice versa.
At an EU event in May in Beijing to celebrate 50 years of diplomatic relations with China, former French Prime Minister Michel Barnier attacked Beijing’s “distortive policies which lead to industrial over-capacity.”
With the U.S. closed or nearly closed to many Chinese goods, their producers look to the EU as the only market large and rich enough to absorb them.
“These challenges are not only economic issues but also have a social and political nature,” said Barnier. “Our public opinion is becoming increasingly negative toward free trade. Imbalances threaten European industries and ultimately European jobs.”
In addition, Beijing’s strong support for Vladimir Putin and his invasion of Ukraine disgusts European governments and public opinion.
Last year China had a record trade surplus of nearly US$1 trillion. It has built such an overwhelming dominance in a range of industries that many of its trading partners are concerned about swamp by Chinese goods. It has trade surpluses with 172 economies in the world.
In the annual report of the American Chamber of Commerce in China, published on April 23, 63 per cent of companies said that bad Sino-U.S. relations were their biggest operational challenge.
It said that 21 per cent of AmCham members no longer viewed the Chinese market as a priority, double the level before the Covid pandemic.
“Our companies are increasingly wary of investing in China,” said president Michael Hart. “They are concerned about trade barriers and uncertainties about investing here.”
Operating in China also brings many challenges for foreign firms.
“Competition with Chinese private firms is the top challenge for EU firms,” said a survey by the EU Chamber published earlier this month.
The slowdown in China’s economy means intense competition on price among all firms.
Of the EU firms, 38 per cent of small and medium-size companies, said that access to financing was their biggest challenge, followed by limited access to government incentives and funding and challenges with cross-border financing.
Lack of transparency in regulatory requirements and difficulties in obtaining licences and permits was also a challenge.
The absence of foreign firms is also seen in the property market. In Beijing, where foreign companies accounted for 20 per cent of total office demand, the vacancy rate climbed to 21 per cent in the last quarter of 2024 from 17.9 per cent in the fourth quarter of 2020, said Savills, a property consultancy.
In Shanghai, where the presence of foreign firms is even stronger, 22.1 per cent of office space was vacant last year, said CBRE, a property consultancy. Five-ten per cent vacancy is considered normal, 20 per cent is considered “dangerous”.
But, Eskelund said, EU firms still needed to be in China. “If you are competing in the global marketplace with global supply chains and if you want to be able to compete on price and quality, China is still a place you need to be.”
To avoid the trade tensions, EU firms in China are increasingly localising – buying local goods and services to cut dependence on imports and reduce the risk to their Chinese supply chains.
“So, even though everyone talks about de-risking and everyone wants to be less dependent on China, we actually see a little bit the opposite. The trade war is not stopping this trend. In some ways, we are actually seeing dependencies on China growing, not diminishing,” said Eskelund.
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