On October 18th, President Xi Jinping announced during his keynote speech at the opening ceremony of the third “Belt and Road” International Cooperation Summit that China will comprehensively remove foreign investment access restrictions in the manufacturing sector. This comes as the national manufacturing industry has already been largely open, and the negative list of manufacturing in the free trade trial zone has been cleared.
Nationally, according to the “Special Management Measures (Negative List) for Foreign Investment Access (2021 Edition)”, only two items remained in the manufacturing sector: “Publication printing must be controlled by Chinese parties” and “Prohibition of the application of processing technologies such as steaming, frying, roasting, and calcining in traditional Chinese medicine slices and the production of proprietary Chinese medicine products.”
In the free trade trial zone, as of January 1, 2022, the manufacturing entries in the “Special Management Measures (Negative List) for Foreign Investment Access in the Free Trade Trial Zone (2021 Edition)” have been completely cleared, reduced to a total of 27, with 17 prohibited and 10 restricted.
Releasing Key Signals
From an external perspective, the comprehensive opening of the manufacturing sector on the 18th signals an essential transformation in the Chinese economy. “China’s manufacturing industry has moved from the mid-to-low end to the mid-to-high end in global production, supply, and value chains. This comprehensive opening is good news for the world, especially for manufacturing,” said Wei Jianguo, Vice Chairman of the China International Economic Exchange Center and former Vice Minister of Commerce. He highlighted that the full removal of foreign investment access restrictions in the manufacturing sector sends out three crucial signals:
- China’s rise was built on the “backbone” of the manufacturing sector, and its continued prosperity and strength will still depend on it.
- The beginning of China’s high-level external opening will be marked by the comprehensive removal of foreign investment restrictions in manufacturing.
- China’s future economic growth will still rely on the real economy, deviating from the path of Western countries that gradually shifted to services and neglected manufacturing.
The Chinese Academy of Commerce’s Bai Ming also stated that for China to leap from a manufacturing powerhouse to a global leader, it must actively participate in globalization and use all available high-quality global resources.
Since 2017, China has revised the negative list of foreign investment access for five consecutive years. The 2021 editions for both national and free trade trial zones have been reduced to 31 and 27 items respectively, canceling or relaxing foreign ownership restrictions in various industries, offering more market opportunities for foreign investors.
Huang Feng, President of the Shanghai Foreign Investment Association, told First Financial Daily that manufacturing’s foreign investment access had already been largely open at the national level, so this comprehensive opening was more of a symbolic gesture.
Adjustment of Foreign Investment Structure
According to data from the Ministry of Commerce, the actual use of foreign capital in the first eight months of 2023 reached RMB 847.17 billion, a decrease of 5.1% year-on-year. This marked the first decline in this data in three years.
High-tech manufacturing sectors saw significant increases in foreign investment, including electronics and communications equipment manufacturing, medical equipment, and R&D and design services.
This year, foreign businesses have been actively expanding and deepening their investments in China. In September, major corporations such as DuPont, Solvay, and others announced significant projects in the country.
In recent years, China has seen steady growth in foreign investments. The “China Foreign Investment Statistics Bulletin 2023” showed that in 2022, China’s actual use of foreign capital reached USD 189.13 billion, an increase of 4.5%.
Upgrading Amid Challenges
In the era of the reshaping of global value chains, how should China’s manufacturing industry achieve continuous breakthroughs, and how should it address challenges in attracting foreign investment?
Wei Jianguo pointed out that China’s manufacturing industry still faces bottlenecks in certain key technologies and equipment, such as chips, photolithography machines, and etching machines. In response to these, China should invest more and take a three-pronged approach:
- Every manufacturing sector should prioritize technological innovation, especially under the current digital economy.
- Talent is crucial for technological innovation. China’s manufacturing sector should not only nurture local talent but also attract a lot of foreign talent.
- China should create the world’s best business environment, matching all production factors, i.e., capital, talent, technology, land, and information, to achieve the most efficient results with the least input.
In Wei’s view, in the context of the U.S. urging manufacturing to return, China should make good use of its unified large market, as market resources are China’s biggest international advantage. “Setting up factories in the U.S. and exporting to the Chinese market, or directly setting up factories in China, many CEOs of U.S. and European multinational companies know better than us and have more detailed considerations. This is why, recently, there have been visits to China by industry giants like Musk and Cook.”
According to him, the era of attracting foreign investment with preferential policies and low labor costs is over. To achieve new means and goals for attracting foreign investment, besides relying on a large market, we must also benefit from rules, regulations, management, and standards. Moreover, the current domestic consumption recovery momentum is relatively weak, necessitating more policy interventions. He believes that the scale of foreign investment attracted this year could reach USD 230-250 billion.
Gao Ruidong, Chief Economist at Everbright Securities, also said at the recent China Macroeconomic Forum that foreign companies invest in China primarily for its market, followed by its business environment and related cost advantages. If overall demand is insufficient and prices remain relatively depressed, China’s attractiveness to foreign businesses will systemically decline.
To address these challenges, on August 23rd, the State Council issued opinions on further optimizing the foreign investment environment and intensifying efforts to attract foreign investment, outlining 24 specific measures in six areas.