(Yicai) Aug. 22 -- China's policymakers should pay close attention to the adverse impacts of the "de-Chinaization" trend in supply chains and introduce more measures to reverse the situation.

In recent years, Western countries have been promoting a shift away from Chinese supply chains, undermining the willingness of multinational companies to commit to long-term investments in China and leading to a continuous decrease in foreign direct investment.

FDI Hits Multi-Year Low

China has two official metrics for FDI: the balance of payments data compiled by the State Administration of Foreign Exchange and the actual utilized foreign investment data reported by the Ministry of Commerce. Last year, both metrics slumped to their lowest levels in more than a decade.

Among them, the SAFE recorded USD18.6 billion in such cross-border flows last year, a 64 percent decline compared to the previous year, marking the lowest level since 1993. Meanwhile, the MOFCOM reported a 29 percent decrease in the amount of foreign capital approved for use in China, falling to USD116.2 billion, the weakest level since 2013.

In recent years, China has attracted significantly less FDI than the global average. According to the Organization for Economic Co-operation and Development, global FDI in 2024 remained flat compared to the previous year, while data from the United Nations Conference on Trade and Development showed an 11 percent decline.

Global Supply Chain Restructuring

While cyclical factors within China’s economy are one of the reasons behind the decline in FDI, the more noteworthy challenge lies in the impact of global supply chain restructuring.

In recent years, Western countries, led by the United States, have been actively promoting the "de-Chinaization" of supply chains. They have introduced various pieces of legislation to suppress trade with China, imposed technological restrictions, and implemented "friend-shoring" policies aimed at moving supply chains to regions controlled by allies. These measures have significantly dampened the willingness of multinational companies to invest in China.

The year 2018 can be regarded as a turning point for the restructuring of global supply chains. In the five preceding years, China’s annual average greenfield investment (referring to investments by multinational corporations to build new local facilities) was USD70.3 billion. However, in the following five years through 2024 (excluding 2020, a year heavily impacted by the Covid-19 pandemic), this figure dropped to USD38.6 billion, according to the UNCTAD.

This year, the US has further leveraged tariff negotiations to encourage other countries to reduce their reliance on trade with China. For example, during tariff negotiations with Vietnam, the US requested Vietnam to reduce the use of Chinese components in equipment assembled in Vietnam and exported to the US.

From a medium- to long-term perspective, the strategic direction of "de-Chinaization" in the industrial chains of Western countries is very clear. China should pay close attention to the risks posed by the resulting contraction in FDI and the potential relocation of mid- to high-end industrial chains. It is crucial to mitigate the adverse impacts these changes could have on technological innovation and economic development.

How to Reverse the Downward FDI Trend

At the policy level, China has already implemented several measures to address the decline in FDI.

For instance, the State Council issued the Action Plan for Stabilizing Foreign Investment in February, proposing to accelerate the opening-up of the service sector, encourage reinvestment by foreign enterprises, and expand the catalogue of industries open to foreign investment.

Going forward, China should focus on the following three aspects to reverse the sluggish FDI trend.

First, the nation should firmly uphold free trade and multilateralism and actively promote China-US trade negotiations to delay the decoupling process as much as possible. It should also maintain stable economic and trade relations with the European Union, and further strengthen multilateral cooperation mechanisms with developing countries.

Second, China should expand high-level opening-up by fully removing foreign investment restrictions in the manufacturing sector, further opening the service sector, enhancing intellectual property protection, and advancing the rule of law to ensure a fair and competitive market environment.

Lastly, China needs to actively expand domestic demand and boost consumption, allowing foreign enterprises to fully benefit from the continued growth of the Chinese market. For example, beyond consumer subsidies, China could introduce more policies to support service spending and reduce restrictive measures in sectors related to consumption.

The author of this article is the chief economist of e-commerce company JD.Com.

Editors: Dou Shicong, Emmi Laine