“China needs to change. The country knows it needs to change. Everyone knows it needs to change. And we want to help it change.”~Scott Bessent, U.S. Treasury Secretary.
Since the onset of economic reforms in the 1980s, China has relied heavily on foreign direct investment (FDI) to accelerate industrialization and spur economic growth. However, things started to change during recently years. In February 2025, the Wall Street Journal reported a new “Anything but China” trend, which features Western technology companies’ runaway from China and relocation of business into somewhere else. How serious is China’s outflowing of foreign capital? In April 2025, Mitsui & Co. Global Strategic Studies Institute (MGSSI) published a report that sought to unfold the truth based on statistical data, survey reports, and local interviews of foreign enterprises.
According to the report, China’s net FDI reached a peak of 344.1 billion dollars in 2021, followed by continuous declining for three consecutive years. In 2024, FDI dropped to a historically low level of 4.5 billion dollars, just 1.3% of FDI in 2021. The first net FDI outflow occurred in the third quarter of 2023, and happened again in the second quarter of 2024. Surveys also showed decreasing willingness for major multinational companies to invest in China. For example, in 2020, 36.6% of Japanese companies considered further investment in China, while only 6.7% pondered divestment. However, in 2024, 21.7% of Japanese companies were willing to invest in China while 12.3% grew reluctant. Similar patterns can also be found for American and German companies in China.
What drives this sharp decline in China’s FDI? The decline can be attributed to economic slowdown, geopolitical confrontation with the U.S., as well as domestic policy risks, such as crackdown on foreign espionage and suppression on cross-border data transfer. Other driving forces may involve the U.S.-China interest rate differentials and the relatively lower returns on China’s stock markets. At the same time, it is advisable to distinguish between equity capital investments and debt capital investments. In 2024, there were simultaneously a net outflow of debt capital investments worth 54 billion dollars, and a net inflow of equity capital investments worth 58.5 billion dollars.
The report uses specific sectors to grasp the reality of China’s FDI between 2013 and 2023. The FDI ratio in manufacturing reached 38.7% in 2013, but dropped to 27.9% in 2023. Real estate accounted for 7.2% of FDI in 2023, compared to 24.5% in 2013. Scientific research & technical services accounted for 18.0% of FDI in 2023, compared to merely 2.3% in 2013. High-tech industries (semiconductors, pharmaceuticals, medical equipment, autonomous driving, electric vehicles, and hydrogen) experienced a rising trend in FDI utilization, from 23.2% in 2018 to 37.4% in 2023. This somewhat echoes Chinese government’s official statement that what is actually happening is not withdrawal from foreign investors, but optimization of foreign investment utilization.
Some foreign companies, especially German ones, choose to pursue further localization to achieve optimization. This marks the phase of “Localization 3.0”, a term coined by the German Chamber of Commerce in China. Localization 1.0 emphasized market access constraints, which implicitly forced foreign companies to form joint ventures with Chinese counterparts. Localization 2.0 emphasized local procurement, local R&D, and cooperation with local partners. The travel restrictions accompanying the COVID-19 pandemic further accelerated the process of localization. Localization 3.0 emphasizes the deepening of localization strategies, embedded in government regulatory requirements and intensifying local competition, in order to mitigate geopolitical risks.
In conclusion, the author acknowledges that China’s good old days are surely gone while India and Southeast Asia are catching up in attracting foreign investments. Despite the sad facts, China still possesses solid industrial infrastructure, thriving industrial clusters, and huge consumer markets. In fact, foreign investments have grown more diversified into high-tech industries, environment-related manufacturing, healthcare, and sports. For foreign investors, the opportunities arising from the Future China must be weighed against the risks posed by the Present China. To bring foreign capital back, the author asserts that China needs to promote private enterprises, raise policy transparency, ensure fair regulation, and improve its relations with the United States.
China stands as a unique existence for the world. Multinational companies love China for its huge consumer markets. National governments fear China for its huge manufacturing capacity. As debates over the future of China keep raging on, it becomes absolutely essential for the academic community, the business world, and the policy circle to have a fresh look at what is going on in China and where China is going, so that they will not be deterred, deceived or defrauded by the illusion of China, either as a rising dragon or a falling dinosaur.
The article is based on Mitsui & Co. Global Strategic Studies Institute’s “Trends in Foreign Investment in China: Beyond the ‘Withdrawal’ Narrative—Has China Lost Its Appeal as an Investment Destination?”, authored by Hideaki Kishida. Read the full report