A fundamental policy shift under Chinese President Xi Jinping has created new challenges for foreign investors, prompting a decline in foreign direct investment in the People's Republic of China.
In 2023, the net total of foreign direct investment (FDI) in the People’s Republic of China (PRC) was approximately $33 billion, a figure that is down approximately eighty percent from 2022 and less than ten percent of the peak net flow of $344 billion in 2021.[2] Foreign direct investment is a type of cross-border investment where an investor from one country “establishes a lasting interest in and a significant degree of influence over an enterprise . . . in another country.”[3] Why is this happening? Foreign businesses credit a variety of factors for this decreased investment in the PRC, including increasingly stringent laws imposed on businesses and economic stagnation in the wake of the Covid-19 Pandemic.[4]
The most cited and controversial law passed by the PRC is the Anti-Espionage Law initially adopted in 2014 and subsequently revised in 2023. The law purports to prevent espionage and “maintain national security” for the PRC, a top policy goal under Chinese President Xi Jinping.[5] The Chinese Communist Party (CCP) ambiguously defines “acts of espionage” to include any activities that “endanger the national security” as well as activities by foreign organizations attempting to gain access to “state secrets” or “items related to national security”––all terms not further defined by the law.[6] Another provision targets individuals and organizations suspected of unlawfully obtaining or possessing “documents, data, materials or items that are state secrets,” once more not defining these terms.[7] Upon approval by the state security organ that such action is necessary for staff to perform their counter-espionage duties, authorities may inspect electronic equipment and facilities as well as “read or collect relevant documents, data, materials, or items.”[8]Overall, this law is ambiguously worded and gives Chinese authorities significant latitude to examine the inner workings of foreign businesses operating in the PRC, making business owners more cautious in continuing operations there.
Further, the law’s reach may not be contained to “state secrets” moving forward. An amendment that took effect on May 1, 2024 has expanded the law to cover “work secrets,” which the amendment “broadly defines . . . as information that would result in an ‘adverse impact’ if leaked.”[9] This amendment further exacerbates the imposing security apparatus foreign businesses must deal with in the PRC.[10]
Laws such as the Anti-Espionage Law are products of a fundamental policy shift under President Xi that has stressed national security above economic development. Since coming to power in 2013, President Xi has viewed security as the most important avenue for guaranteeing CCP rule, ultimately dubbing this concept as “comprehensive national security.”[11] In addition to concerns about securing internal rule, perceived external threats from the West have also played a major role in shaping President Xi’s policy making.[12] This reorientation has seen a departure from the beliefs of his predecessors that economic prosperity is the best guarantor of CCP power.[13] Through this transition to a “security first” model, the CCP under President Xi has erected a more comprehensive security apparatus that is substantially more involved in the country’s economy, therefore creating an environment more difficult to navigate for foreign businesses. Operating the country’s security apparatus is now more central than economic decision making.[14]
In addition to the government crackdown in the economic sector, there are other developments in the PRC contributing to the dramatic decrease in FDI. Issues including a record real estate crisis, deflation, and a shrinking workforce have also made foreign firms weary of the PRC’s current state.[15] Amid these problems, the CCP has taken some action. First, the Chinese government amended its antitrust laws to make acquisitions involving foreign companies more feasible by easing the revenue requirement for companies subject to screenings by the government.[16] The CCP also issued a general plan aimed at attracting foreign investment in the PRC. Some of the highlights of this plan include “optimiz[ing] the fair competition environment,” increasing financial support to foreign-funded projects, “pilot project[s]” aimed at helping foreign investment access to the technology industry, and building an “‘invest in China’ brand.”[17] While it remains unclear whether any of these provisions will come to fruition, the plan at least provides a potential course of action for making the PRC more foreign business friendly.
Moving forward, it is unclear whether this development regarding foreign direct investment will continue in 2024. Businesses have shifted some of their attention to other states in the region such as Vietnam, Malaysia, and India. However, so far this shift has not occurred on a large scale. Western, and particularly the U.S., economies and the Chinese economy are codependent. As much as international developments and rising tensions may suggest that a decoupling is imminent, the interconnection of the two systems is too deep to be simply undone in a short period of time.
[1] Ju Peng, photograph of Chinese President Xi Jinping, in In pictures: Chinese President Xi Jinping, CNN (Oct. 4, 2022, 12:39 PM), https://www.cnn.com/2021/11/12/asia/gallery/xi-jinping-life-career-2021/index.html.
[2] Iori Kawate & Shunsuke Tabeta, Foreign Direct Investment in China Falls to 30-year Low, Nikkei Asia (Feb. 19, 2024, 4:00 JST), https://asia.nikkei.com/Economy/Foreign-direct-investment-in-China-falls-to-30-year-low.
[3] Foreign Direct Investment (FDI), OECD iLibrary, https://www.oecd-ilibrary.org/finance-and-investment/foreign-direct-investment-fdi/indicator-group/english_9a523b18-en (last visited Sept. 12, 2024).
[4] Kawate & Tabeta, supra note 2.
[5] Anti-Espionage Law of the People’s Republic of China, Chapter I: General Provision, Article I.
[6] Id. at Chapter I, Article 4(1) and 4(3).
[7] Id. at Chapter I, Article 14.
[8] Id. at Chapter I, Articles 25 and 26.
[9] Evelyn Cheng, China Doubles Down on National Security, Expanding its State Secrets Law, CNBC (Feb. 28, 2024, 1:14 AM), https://www.cnbc.com/2024/02/28/china-doubles-down-on-national-security-expanding-its-state-secrets-law.html.
[10] Id.
[11] Andrew Latham, How Xi Jinping’s Obsession with Security Derailed China’s Rise, The Hill (Oct. 25, 2023, 5:30 PM), https://thehill.com/opinion/international/4275496-how-xi-jinpings-obsession-with-security-derailed-chinas-rise/.
[12] David Pierson, In Xi’s China, Economic Needs May Take a Back Seat to Security, N.Y. Times (May 12, 2023), https://www.nytimes.com/2023/05/12/world/asia/china-xi-security-economy.html.
[13] Latham, supra note 11.
[14] Pierson, supra note 12.
[15] Laura He, Chinese Stocks Have Lost $6 Trillion in 3 Years. Here’s What You Need to Know, CNN (Jan. 23, 2024, 7:36 AM), https://www.cnn.com/2024/01/23/investing/china-stock-market-losses-explained/index.html.
[16] Kawate & Tabeta, supra note 2.
[17] General Office of the State Council, The General Office of the State Council on the Issuance of “Solid Promotion” High-Level Opening up to the Outside World, Greater Attraction and Notice of the Action Plan for the Use of Foreign Investment, 3, 6, 8 (Feb. 28, 2024), https://www.gov.cn/zhengce/content/202403/content_6940154.htm.
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