Service Sector Dominates as FDI into China Continues to Rise in 2016

Despite the slowdown in the Chinese economy, foreign investors are still continuing to pile money into the country. Foreign direct investment (FDI) into China grew steadily in January and February this year, rising 2.7 percent year on year to US$22.52 billion, according to the Ministry of Commerce. What has changed is a re-focusing of the worldwide services industry, where some 62.8 percent of all new FDI into China originates from. Of this, FDI in the high-tech service industry grew 157 percent year on year, with investors from the United Kingdom, the United States, the European Union and Japan all continuing to be buoyant.

“We are seeing some retrenchment by foreign-owned, China-based manufacturers to other parts of Asia, especially ASEAN,” says Chris Devonshire-Ellis, Chairman of Dezan Shira & Associates. “Wage and social security payments in China are high, especially when large workforces are required. These businesses are starting to move to lower cost destinations. But China’s overall FDI position shows that these industries are being replaced with new technologies and services, and this is the start of a new China boom in this area.”

This change is very much part of China’s Central Government development policy. Chinese leaders, including President Xi and Premier Li, have often stressed that China will continue efforts to attract more FDI in an increasingly diversified list of sectors. MOFCOM spokesman Shen Danyang stated just last month that MOFCOM were considering new changes in FDI utilization. Amongst them are:

• China will strengthen its legal system for foreign investment, particularly in two areas:

1. Accelerating the revision of the Law of the People’s Republic of China on Chinese Foreign Equity Joint Ventures, the Law of the People’s Republic of China on Foreign funded Enterprises, and the Law of the People’s Republic of China on Chinese-Foreign Cooperative Joint Ventures;
2. Drafting the Foreign Investment Law and trying to submit the draft to the National People’s Congress for approval in 2016.

• China will further lower the threshold for foreign investment and encourage foreign companies to invest in sectors including high-tech, environmental protection and cutting edge services, in order to supplement the insufficient supply of products and services in these areas.

These statements indicate the importance that China is attaching to the services sector. The latest FDI figures show that this intent is already having a positive effect on driving foreign investment into China. This also goes hand in hand with a strengthening of China’s relationship with Hong Kong, which has been a de facto services center for China for decades.

RELATED: Hong Kong and China Trade in Services CEPA Supplement Agreement

China’s consumer market may still be soft, but change is underway and the country is upgrading from a manufacturing to a services driven economy. Much of the talent, innovation and expertise will come from the West, as China has much to learn and implement in its services sector.

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