Experts Call for Innovative Thinking to Attract Foreign Investment as China's FDI inflows fall below Japan's

Report by Southern Metropolis Daily on CCG's 11th China Inbound-Outbound Forum

This is a translation of a report by Southern Metropolis Daily 南方都市报 on CCG's 11th China Inbound-Outbound Forum on September 14, published on September, 15.

The video recording of the forum has been uploaded to CCG's official YouTube channel and is also accessible on the Chinese internet.

中国外资流入额已低于日本，专家呼吁吸引外资需要创新思维

With China’s FDI Inflows Falling Below Japan’s, Experts Call for Innovative Thinking to Attract Foreign Investment

On September 14, during the 2024 China International Fair for Trade in Services (CIFTIS), the Center for China and Globalization (CCG) and the Beijing "Two Zones" Office co-hosted the 2024 Beijing "Two Zones" Development & China Inbound-Outbound Forum (the 11th China Inbound-Outbound Forum) at the National Convention Center. Experts at the forum engaged in comprehensive discussions about China's opennes in the global economy and its current challenges. Tu Xinquan, Professor and Dean of the China Institute for WTO Studies at the University of International Business and Economics, highlighted the decline in China’s foreign direct investment (FDI) inflows as a sign of challenges in the country's policy and market environment. He emphasized that China is at a critical juncture, transitioning from factor-based to institutional opening up, which requires addressing the institutional issues faced by foreign enterprises.

2024 Beijing "Two Zones" Development & China Inbound-Outbound Forum

China's foreign direct investment inflows as a percentage of GDP have fallen from 7% to 1%, lower than Japan's.

When discussing ways to optimize China's policy environment, particularly for service trade and high-tech industries, Tu Xinquan first acknowledged the country’s high openness to foreign investment, citing a 7% FDI inflow as a percentage of GDP in manufacturing as strong evidence of China's success in opening up.

However, Tu noted that the sharp decline of FDI inflows from 7% to 1% reflects significant challenges in current policy and market conditions. "China's rapidly decreasing FDI percentage has now fallen below Japan's, which is somewhat abnormal," he observed.

He highlighted that while the reasons for this decline are complex, policy factors, especially in the service sector, may have played a critical role. Tu stressed that China's current shift from factor-driven to institutional openness is the right approach to addressing the institutional issues facing foreign enterprises.

Guo Wenjie, Deputy Director-General of the Beijing Municipal Commerce Bureau, also addressed the decline in FDI inflows. He explained the logic of global capital flows, stating, “Money will always flow to where it can earn a profit; capital moves to industries that generate returns. It's an objective principle of capital flow.”

Guo observed that as China transitions from relying on demographic dividends to leveraging talent dividends, some lower-end industrial chains may relocate to other countries. However, high-end industrial chains are expected to continue developing within China.

Massimo Bagnasco, Vice President of the European Union Chamber of Commerce in China (EUCCC), discussed the challenges EU companies face in China, particularly regarding profit margins and return on investment. He acknowledged that while the Chinese market offers rapid development and significant investment opportunities, it also presents certain challenges and obstacles.

"For multinational corporations with mature operations in China, it remains a very important market," he noted. However, small and medium-sized enterprises may hesitate to invest due to concerns over data and technology regulations.

Services and stock markets may become new strategies to attract foreign investment.

At the forum, Guo Wenjie emphasized the development of China's service market, such as the eldercare and health market, and how institutional openness could attract foreign enterprises. He also highlighted the potential of China's stock market, advocating for increased openness to foreign stock markets.

"After 40 years of development, China's stock market has become one of the most vibrant in the world," Guo remarked. He suggested that allowing foreign companies to list in China could further attract foreign investment.

Massimo Bagnasco highlighted the vital role of the service industry in driving market development and innovation. He noted that while service trade significantly contributes to China's GDP, its share in the total trade volume between China and the EU remains relatively low, revealing considerable potential for growth.

Bagnasco emphasized that the service sector is crucial for market expansion and economic transformation during economic transformation. He called for improvements in public procurement and information and communications technology (ICT) to foster a more competitive and equitable environment. "We should think about fairer competition to create a more equal environment in the future," he said. He also referenced the "24 Measures" released by the Chinese government, noting that the EUCCC welcomed these reforms as they addressed some of the Chamber's proposals and expectations.

Liu Chijin, Vice President of the Beijing Association of Foreign-invested Enterprises, also emphasized that China must adapt its strategy for attracting foreign investment to reflect its current economic structure and that the past model is no longer viable. "China no longer exchanges technology for markets; the era of multinational corporations simply entering China with successful products is over," Liu remarked, highlighting the increasing demand for high-end technologies and services.

He proposed that as China's service market, particularly in sectors like eldercare and healthcare, is continuously evolving, the government should place more emphasis on institutional openness to attract foreign enterprises.

Liu Chijin also highlighted the strong appeal of China's stock market, noting that its trade volume far surpasses that of the United States, reflecting significant vitality and potential. He supported his argument with data, emphasizing that the number of IPOs and total trade volume in China's A-share market are several times greater than those in the U.S., showcasing the market's attractiveness to foreign enterprises.

"After 40 years of development, China's stock market has become one of the most vibrant in the world," Liu stated. He advocated for further opening the stock market to foreign investment, including allowing foreign companies to list in China, which he believed would attract more foreign investment and improve the overall quality of the market.

"Why can Naixue Tea, a Chinese tea brand, list in Hong Kong while companies from Spain and Germany cannot on the Chinese stock market?" Liu Chijin questioned, underscoring the need for China to leverage the appeal of its stock market to attract foreign enterprises.

China can no longer rely on outdated perspectives to attract foreign investment.

In discussing regulatory policies, Tu Xinquan noted that there is still room for improvement in the relationship between the government and the market in China. He suggested that the current regulatory approach may be overly stringent, calling for a phase of "regulatory relaxation" or "de-regulation." Tu emphasized that institutional openness should align with international rules, standards, and management practices. He advocated for setting reasonable regulatory standards through enhanced international regulatory coordination.

"China needs to find a way to de-regulate or relax regulation and establish a reasonable regulatory framework that aligns with international standards and best practices through international regulatory coordination; only then can China's opening up be fully realized," Tu Xinquan stated.

Tu also stressed the importance of institutional openness in areas such as property rights protection, industrial subsidies, environmental and labor protection, government procurement, e-commerce, and finance. He particularly highlighted the critical role of intellectual property protection, especially in the service sector, and emphasized the need to address issues related to government and public procurement.

"China should establish a specific State-Owned Enterprises Procurement Law, as the existing Government Procurement Law and Bidding Law do not adequately address procurement issues," Tu Xinquan suggested. He noted that differing interpretations of government procurement between China and the EU could lead to unfair treatment of foreign enterprises in practice.

Tu highlighted that, due to geopolitical tensions, the priorities of some enterprises and governments have shifted from "development first" to "security first" or "risk minimization first." He warned that this shift in focus could lead to deviations in policy implementation, which need to be corrected through legal measures.

Massimo Bagnasco also called for actively attracting more EU companies to invest in China to create a clustering effect and drive market development through innovative collaboration. He stressed the importance of cooperation and expected further advancements in policy and market environments.

"We hope for the development of high-quality service trade and high-level, high-quality opening up, the faster the better. These can all contribute to a very favorable environment," he concluded, looking forward to a more prosperous future for EU enterprises in China.

When discussing the efficiency of government services, Liu Chijin shared his personal experience, noting that the processes for foreigners to obtain residence and work permits remain cumbersome and time-consuming. He suggested that the government should streamline these procedures to improve efficiency and attract more foreign talent.

"We must face reality and cannot rely on outdated perspectives to attract foreign investment," Liu urged, calling for innovative thinking to draw foreign investment. He emphasized the need to leverage China's strengths, such as the growing potential of the service market and the vitality of the stock market while improving government services to foster a more friendly and favorable environment for foreign enterprises.

Tu Xinquan on China's foreign trade and outward investment