In the essay below, Sang Baichuan asks whether China and foreign investors can continue to “choose each other” after three consecutive years of declining foreign direct investment. His answer is neither a straightforward reassurance that nothing has changed nor a simple narrative of foreign companies abandoning China.
Sang, an outspoken Professor of Economics and Dean of the Institute of International Economy, the University of International Business and Economics, acknowledges the scale of the decline, the deterioration in returns experienced by some foreign businesses, and the continued existence of operational barriers in areas including government procurement, data transfers, standard-setting and regulatory implementation. But he rejects the argument that falling investment primarily reflects Beijing’s loss of interest in foreign capital. Instead, he assigns greater weight to the property downturn and the weakness in domestic demand that followed it, the disruptive effects of digital and intelligent transformation, and, most fundamentally, the increasingly restrictive international investment environment.
Just as importantly, Sang argues that China’s own rationale for attracting foreign investment has changed. Foreign capital is no longer needed principally to fill shortages of domestic capital or foreign exchange, and China is no longer seeking every conceivable form of investment. Foreign investment is now expected to contribute to technological progress, industrial upgrading, institutional reform and supply-chain stability. The relationship has therefore become more selective—and, in Sang’s words, increasingly dependent on “structural compatibility.”
His recommendations focus on three areas: better coordination between opening-up policies and sector-specific regulations in services; clearer and more predictable rules for the cross-border movement of scientific and technological data; and stronger support for foreign investment in high-tech manufacturing amid expanding Western investment-screening regimes.
The article was published on 30 June 2026 on his personal WeChat blog, Sang Baichuan’s Perspective on Opening Up (桑百川的开放观).
中国与外资还能双向奔赴吗？
Can China and Foreign Investors Continue to Choose Each Other?
As China seeks to stabilise existing foreign investment, attract new inflows, and improve investment quality, can the country and foreign investors sustain a mutually beneficial relationship?
I. The Changing Rationale for Attracting Foreign Investment
China’s actual use of foreign capital reached a record US$189.1 billion in 2022. After declining for three consecutive years, however, it fell to US$104.66 billion in 2025—a cumulative drop of 45 per cent, steeper than the decline in global FDI over the same period. Some existing foreign investment has also been withdrawn, while foreign investors have shown a clear preference for asset-light business models.
Yet several important strengths remain. China continues to rank among the world’s leading destinations, attracting more than US$100 billion in new FDI each year. New foreign investment still substantially exceeds divestment, meaning that the overall stock of foreign investment continues to grow. The composition of FDI has also improved, with a steadily rising share flowing into high-technology industries. Meanwhile, China’s vast domestic market and comprehensive industrial system remain highly attractive to international investors, as reflected in the marked increase in the number of newly established foreign-invested enterprises.
Behind these changes in the growth, scale, and composition of foreign investment lies a shift in the rationale for attracting FDI. Foreign investment is no longer sought as a means of addressing the traditional “two gaps” in domestic capital and foreign exchange. Instead, it is expected to promote technological progress and economic restructuring, raise the level of industrial development, spur reforms of economic and administrative institutions, stabilise industrial and supply chains, support the smooth functioning of the economy, and reinforce the interaction between domestic and international economic flows.
Continuing to attract and utilise foreign investment therefore remains essential to China’s integration into the global economy, the development of an open economy, and its strategy of promoting growth through greater openness.
As a result, China no longer welcomes every form of foreign investment indiscriminately. Energy-intensive, highly polluting, and technologically unsophisticated projects are no longer sought after; the emphasis is increasingly on high-quality investment.
China’s accelerating economic transformation has also enabled a large number of domestic companies to emerge as innovative and competitive players, with some gaining an edge over foreign-invested enterprises. Foreign companies with weaker technological capabilities and limited competitiveness have consequently seen their returns decline. Some no longer regard China as an easy place to grab high profits, while others have been forced to leave the market.
The relationship between China and foreign investors has thus become increasingly conditional on structural compatibility.
II. Why Have New FDI Inflows Declined and Some Existing Investments Been Withdrawn?
Is the Decline Simply a Correction from a Record High?
There is no general rule that foreign investment must decline after reaching a high level.
Since 1992, China’s FDI inflows have generally followed an upward trajectory, repeatedly reaching record highs. Apart from modest declines in 1999 following the Asian financial crisis and in 2009 during the global financial crisis, China had never experienced two consecutive years of falling FDI.
It is therefore unconvincing to attribute the recent decline simply to the high base of previous foreign investment.
Has China Become Less Committed to Foreign Investment?
The evidence does not support this explanation either.
Some foreign-invested enterprises have complained that more frequent compliance inspections have raised operating costs. Others have questioned the continuity of foreign investment policies or expressed concern that China’s business environment has changed. Nevertheless, China has continued to attach considerable importance to attracting and utilising foreign investment.
China has implemented the Foreign Investment Law, introduced a negative-list system for foreign investment access, expanded the range of sectors open to foreign investors, and removed all remaining foreign investment access restrictions in manufacturing. Pilot programs for opening the service sector have also been expanded.
The Central Economic Work Conference identified “greater efforts to attract and utilise foreign investment” as a key task for 2023. In 2024, the State Council issued the Action Plan for Advancing High-Standard Opening-Up and Attracting and Utilising Foreign Investment with Greater Efforts. This was followed in 2025 by the Action Plan for Stabilising Foreign Investment.
China’s door has opened wider. It is therefore difficult to argue that China no longer attaches importance to foreign investment.
Market Access Without Permission to Operate?
China’s expansion of market access has not eliminated every problem in the business environment. In some sectors, foreign investors may be formally granted market access but still face barriers to operating in practice. Foreign-invested enterprises continue to raise concerns about intellectual property protection, government procurement, cross-border data flows, participation in standard-setting, regulatory transparency, and fair competition.
These problems, however, are longstanding rather than recent. Nor have they become more severe in the past few years, but have improved noticeably. They therefore offer only a limited explanation for the recent changes in foreign investment.
The Property Downturn Has Been the Most Immediate Cause
Foreign investors naturally prefer markets with faster growth, more business opportunities, and higher expected returns. The economic disruption of the three-year pandemic period punctured China’s property bubble, pushing more than 20 real estate-related industries into varying degrees of contraction.
The property-driven model of rapid economic growth came to an abrupt halt. Large numbers of workers in the property sector and related industries lost their jobs or saw their incomes decline, weakening consumer demand and further aggravating overcapacity in other sectors.
Investment returns fell, capital turnover slowed, banks faced rising non-performing loans, and arrears accumulated among governments and businesses. Mounting debt further weakened the willingness of companies and households to invest and consume.
Against strong supply and weak demand, foreign-invested enterprises have seen their profitability decline, prompting some to scale back investment or exit the market.
Digital and Intelligent Transformation Has Indirectly Reshaped FDI Structure
Embracing the latest industrial revolution, identifying new drivers of growth, and promoting development through economic restructuring and upgrading have become essential to China’s economic renewal. Yet digitalisation and intelligent technologies are also reshaping the distribution of economic opportunities and returns in China.
The rapid growth of online shopping has weakened brick-and-mortar retail and reduced transaction volumes in physical stores. The development of digital banking and online financial platforms has diminished demand for traditional bank branches and other conventional financial institutions. The large-scale use of industrial robots has replaced workers in some industries, contributing to rising unemployment. The widespread adoption of virtual meetings and online business negotiations has reduced expenditure on transportation, hotels, accommodation, and business travel. E-commerce platforms and livestream shopping have also intensified price competition, sharply compressing profit margins and fuelling a damaging race to the bottom.
In this environment, some foreign-invested enterprises have become less competitive, indirectly eroding their profitability and prompting them to scale back investment or adjust their investment portfolios.
Changes in the External Environment Are the Fundamental Cause
The global economy is undergoing profound changes. Unilateralism and protectionism in trade and investment are on the rise, national security is being applied ever more broadly, and global industrial and supply chains are being restructured at an accelerating pace. International direct investment has consequently contracted.
China has become a focal point of the intensifying contest between external containment and efforts to counter it. As the United States and other Western countries increasingly use administrative measures to restrict outbound investment and abuse economic sanctions, multinational corporations have been forced to prioritise security over efficiency by pre-emptively ring-fencing their operations and favouring asset-light investment models. Such arrangements allow them to adjust, separate, or divest business operations rapidly in the event of a severe deterioration in political relations.
This cautious approach has deepened the decline in China’s FDI inflows.
III. Priority Areas and Persistent Obstacles in Attracting Foreign Investment
The service sector is the main focus of China’s efforts to attract more foreign investment. The digital economy offers substantial investment potential in the latest industrial revolution, while high-technology industries are a key arena in the global competition for FDI and a major driver of economic upgrading.
Market Access Without Permission to Operate in the Service Sector
Since 2013, the service sector has accounted for the largest share of China’s actual use of FDI, reaching 72.9 per cent in 2025.
The continued opening of the service sector and the relaxation of foreign investment access restrictions have created new opportunities for overseas investors. The potential for further investment growth is particularly substantial in modern services.
Nevertheless, foreign investment in the service sector continues to face numerous obstacles. In some fields, foreign companies are formally granted market access but still face barriers to operating in practice.
Government departments have yet to form a fully coordinated approach. Policy objectives are inconsistent, specific measures are not aligned, and an effective mechanism for legislative coordination remains absent.
As a result, opening-up policies are not matched by timely revisions to sector-specific laws and regulations. Amendments to subordinate rules lag far behind broader policy decisions, resulting in inefficient implementation and sometimes even contradictory application.
In priority service sectors being opened up—such as culture, education, healthcare, and finance—departmental regulations restricting the operations of foreign-invested enterprises remain in force. These rules are inconsistent with broader decisions to ease foreign investment access, causing the two sets of policies to work at cross-purposes and hindering the implementation of foreign-invested projects.
The Investment Environment for the Digital Economy Needs Further Improvement
The latest industrial revolution is gathering momentum, and the digital economy is expanding rapidly. Increasing marginal returns are replacing diminishing marginal returns, making openness and cooperation increasingly important for realising economies of scale.
Although international investors have generally become more cautious, investment in digital industries has continued to grow. Capital has been concentrated in artificial intelligence infrastructure, data centres, financial technology platforms, e-commerce logistics, and professional software services.
Between 2020 and 2025, the share of Fortune Global 500 companies’ investment in next-generation information technologies—including AI, the Internet of Things, and cloud computing—going to the United States rose from 29 per cent to 45 per cent, while the corresponding share going to Asia (excluding China) increased from 10 per cent to 24 per cent.
China is already among the world’s leading digital economies. With continued openness, cooperation, and innovation, the digital economy could become a major new destination for foreign investment.
However, a global economic governance framework suited to the digital and intelligent era has yet to take shape.
Amid competition over the latest industrial revolution, both advanced economies and emerging markets have introduced new industrial policies to support digital innovation, artificial intelligence, semiconductors, chips, and other emerging and strategically important industries.
At the same time, governments have increasingly linked digital and AI technologies to national security. This has intensified the contest between technological containment and countermeasures, aggravated geopolitical tensions, encouraged unilateralism and protectionism, and accelerated the restructuring of global industrial and supply chains. These developments have posed challenges to international investment and cooperation in the digital economy.
Against this backdrop, cross-border data flows and data security have emerged as important new considerations for multinational investment in the digital economy. Multinational companies now place greater emphasis on the secure and efficient transfer of data across borders.
In China, however, neither national nor local authorities have provided sufficiently clear definitions of “core data” and “important data.” Identification standards are ambiguous, and companies often find it difficult to obtain definitive guidance from sectoral regulators. As a result, enterprises engaged in cross-border data transfers and transactions often incur additional costs to minimise regulatory risk.
Companies seeking to transfer data through the data-export security assessment process face further uncertainty. Existing regulatory documents do not clearly set out the assessment procedures or evaluation criteria, leaving businesses uncertain about what additional data-export security measures they need to adopt or strengthen.
China’s Personal Information Protection Law and Data Security Law distinguish between cross-border data transfers for business purposes and those serving law-enforcement or judicial purposes. Scientific research data, however, often lies on the uncertain boundary between these two categories. A nationally coordinated and unified framework governing the management and cross-border transfer of scientific research data has yet to be established.
Foreign Investment in High-Tech Manufacturing Faces Western Investment-Screening Restrictions
Amid intensifying competition among major powers, high-technology manufacturing has become a major focus of global investment. In 2025, high-technology industries accounted for 32.3 per cent of China’s actual use of foreign capital.
On the one hand, geopolitical tensions and uncertainty over tariffs have prompted some multinational corporations to redirect investment in sectors such as semiconductors and new energy to the United States and its allies to reduce supply-chain risks.
On the other hand, U.S. industrial support has reinforced this trend. Following the passage of the One Big Beautiful Bill Act, the investment tax credit available to semiconductor manufacturers was increased from 25 per cent to 35 per cent. Combined with semiconductor tariffs, these incentives have substantially reduced the costs and risks associated with investing in semiconductor production in the United States, encouraging companies to accelerate the construction of manufacturing facilities there.
To preserve its international competitive advantage in strategically important manufacturing, the United States had already established, during the Biden administration, an integrated regulatory framework combining inbound investment screening, outbound investment controls, and export restrictions. The Trump administration has continued this approach. On 21 February, 2025, it issued the America First Investment Policy memorandum, incorporating economic security into national security and laying the policy foundation for the weaponisation of investment screening in high-technology manufacturing.
The United States is also seeking to build an alliance of investment-screening regimes. It has encouraged the European Union, the United Kingdom, Japan, and other partners to adopt corresponding investment-review measures towards China, align themselves with U.S. technological restrictions, and help exclude China from global innovation chains.
U.S. investment-screening policies have directly affected China’s ability to attract foreign investment in high-technology manufacturing. They have also coerced third-country investors to redirect investment elsewhere.
These restrictions are likely to impede U.S. investment in ten major Chinese high-technology fields, including artificial intelligence, semiconductors and microelectronics, quantum computing, and aerospace. They have also created a chilling effect across industries and countries, discouraging investment in other sectors.
The United States is also expected to adjust and expand the range of key technologies subject to investment screening over time. Other high-technology industries included on the U.S. Critical and Emerging Technologies List, even if not currently subject to explicit restrictions, may become major targets in future rounds of expansion.
The European Commission’s European Economic Security Package, released on 24 January, 2024, contains proposals to reduce the risk of sensitive technologies leaking through investment. These measures echo the U.S. investment-screening approach and may further constrain multinational investment in China’s high-technology industries.
IV. Policy Priorities for Stabilising the Scale and Improving the Quality of Foreign Investment
The Ministry of Commerce, the National Development and Reform Commission, and the Ministry of Finance recently issued the Action Plan for Consolidating, Stabilising, and Improving Foreign Investment.
The plan sets out 15 policy measures in five areas: expanding market access, improving investment facilitation, strengthening investment promotion, enhancing services and safeguards for foreign-invested enterprises, and improving the administration of foreign investment.
It responds directly to the concerns of foreign-invested enterprises and aims to create a more favourable business environment. Its implementation provides a useful framework for examining how to remove the main obstacles and address the practical difficulties facing foreign investment in priority sectors.
First, Strengthen Coordination in the Institutional Opening up of the Service Sector
Government departments should ensure that their respective policies towards foreign investment are consistent. Departmental rules that conflict with measures intended to expand foreign access to the service sector should be systematically reviewed and repealed.
Major opening-up initiatives should be accompanied by detailed implementation rules. The objectives and tasks in the continued expansion of institutional opening-up should be clearly identified.
For each sector, the government should draw up a list of problems requiring targeted reform, clearly assign powers and responsibilities, and make reform tasks and implementation progress transparent and trackable. This would help remove the systemic institutional obstacles that continue to impede institutional opening up.
Second, Accelerate the Development of a Cross-Border Framework for Scientific and Technological Data to Promote Foreign Investment in the Digital Economy
The experience of cross-border data pilot programmes in Shanghai, Tianjin, and Hainan should be reviewed promptly. On that basis, China should improve its rules for cross-border data flows, refine provisions relating to data sovereignty and security protection, and design negative lists with caution. The aim should be to ensure that regulatory oversight of cross-border flows of scientific and technological data is standardised and consistent.
International data exchanges and trading centres should also be used to provide foreign-invested enterprises with efficient data-circulation and transaction services. This would help make cross-border scientific and technological data flows more standardised and internationally compatible.
Third, Provide Stronger Support for Foreign Investment in High-Tech Manufacturing
First, China should improve investment facilitation in high-technology industries. Where necessary, China could consider offering foreign investors in high-technology sectors preferential treatment beyond national treatment. Such measures could help offset the loss of investor confidence caused by U.S. investment-screening policies and respond to the concerns of multinational technology companies.
Second, China should build on the implementation of the WTO Agreement on Investment Facilitation for Development by continuing to improve a market-based, internationally-oriented business environment underpinned by the rule of law.
It should expand international scientific and technological cooperation and attract more international and private capital to research and development, thereby supporting innovation and helping to counter technological restrictions imposed by the United States and other Western countries.
Finally, China should increase research and development support in sectors most likely to be affected by external screening restrictions. The role of government investment in supporting innovation in hard-technology industries should be fully leveraged. Fiscal, taxation, and financial policies supporting research and innovation should apply equally to state-owned enterprises, private companies, and foreign-invested enterprises to foster the growth of emerging industries and industries of the future.
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“Structural compatibility” marks a subtle shift from openness as access to openness as selection. Foreign capital remains welcome when it reinforces technological upgrading and supply-chain security. The difficulty is that compatibility may be judged only after investment, through procurement, data, and standards. Predictability—not formal market access—may therefore become the real test of openness.
Thank you for translating this — "structural compatibility" is the honest phrase, and it deserves more attention than the headline decline. When the reason for inviting capital shifts from filling gaps to acquiring capability, the invitation carries its own expiry date. Ford signed a technical-assistance contract with Moscow in 1929 to raise the Gorky auto works; by the mid-thirties the pupils no longer needed the teacher. The 45 per cent fall is priced; the change in what the door is for is not. Which investors still hold something China cannot yet build — that is the real negative list.