China’s inflows of foreign direct investment (FDI) may not be as promising as its double-digit growth figures suggest as they are concentrated around a handful of large multinationals, certain sectors and countries, according to new research findings from the New York-based Rhodium Group. The study also noted that there could be an acceleration in European firms trying to reduce their dependency on China. “Market conditions have become far more challenging due to restrictive Covid-19 policies, slowing economic growth and rising geopolitical tensions,” according to the findings released by Rhodium Group researchers Agatha Kratz, Noah Barkin and Lauren Dudley. “Virtually no new European firms have chosen to enter the Chinese market in recent years,” they said. “And acquisitions of Chinese firms have stalled, with greenfield investments increasingly dominating the FDI landscape.” European countries are still the third-largest source of FDI into mainland China, following Hong Kong and Singapore.
The Rhodium Group found that the top 10 European firms investing in China made up nearly 80% of Europe’s total investments from 2018 to 2021, marking a sharp increase from 49% during the 2008-17 period. German carmakers Volkswagen, BMW and Daimler, and chemicals giant BASF, led the way in China, accounting for 34% of all European FDI into China by value in the past four years. Five sectors – cars, food processing, pharmaceutical and biotech, chemicals and consumer products manufacturing – now make up nearly 70% of all FDI, compared with 57% from 2008-12 and 65% from 2013-17, the report showed. Four countries – Germany, the Netherlands, the United Kingdom and France – made up 87% of the total investment value in the past four years. German businesses contributed 43% of the money pouring into the world’s second-largest economy from Europe. Earlier this month, BASF kicked off initial operations at its €10 billion Zhanjiang plant – the largest investment project ever by a German business in China.
“The first quarter of 2022 was successful for multinational companies operating in several sectors,” Massimo Bagnasco, Vice President of the European Union Chamber of Commerce in China told the South China Morning Post. “Despite China’s ongoing Covid restrictions, businesses were largely able to maintain their operations and travel to do business within mainland China, although they had to operate within closed-loop systems at the national level. Things have since deteriorated, with a lack of ability to freely move within mainland China now a source of mass uncertainty. Businesses need more certainty and visibility. This is essential not only for companies that are operating in China, but also for attracting new foreign investment. Who is going to invest in a place that they can’t travel to and experience first-hand? It is not a matter of geopolitics, but a matter of money and business.”
Rhodium’s conversations with stakeholders indicated that smaller European companies are particularly reluctant to accept the growing risks of investing in China, owing largely to the pandemic and China’s accompanying zero-Covid strategy. “We believe it is likely that the gap between the ‘chosen few’ and the broader swathe of European companies that are reducing their China exposure – either by paring back their footprint on the ground or putting future investments into other markets – could become more pronounced in the years to come,” the research firm said.
