Investment
Outlook
China - 2024
In this issue:
China’s investment landscape
Looking back on 2023, China swiftly shifted from a zero-COVID stance to lifting all restrictions in January, providing a substantial boost to economic expectations. Despite a gradual post-COVID recovery, policymakers in November eased some foreign investment restrictions, particularly in manufacturing. Simultaneously, China’s structural transformation is fueling growth in high-value manufacturing and high-tech industries, signaling positive prospects for foreign investors in 2024.
Economic growth
While the rest of the world’s economies struggled to recover in the turbulent year of 2023, China’s economy stood out as a model of resilience. After nearly three years of strict “zero Covid” pandemic measures, China’s GDP recovered to grow 5.2% in 2023, hitting the government’s official target. Given the difficult global economic environment, this expansion would be considered quite a significant pick-up compared to its poor performance of 3% growth in 2022 and the initial unoptimistic forecast at 4.4% of IMF.
Despite China being on track for 2023, its growth is predicted to slow in 2024 due to a number of structural challenges, including the high levels of local government debt and aging population, as well as the problems facing the real estate industry when sales of property stagnate and prices fall steeply, causing threats of defaults on bank loans and a widespread financial crisis at small and medium-sized banks. The IMF sets China’s growth at 4.6%, while the World Bank anticipates the rate of 4.5% annually in 2024.
Exports
China’s overall exports decreased for the first time in 7 years as demand for its products slowed abroad. In 2023, exports totaled 3.38 trillion USD, a 4.6% decline from the previous year. The last time China suffered a decrease in overseas shipments was in 2016, when exports dropped by 7.7%.
The United States continued to be China’s largest single-country trading partner in 2023, making up 11.2% of total trade. That was a decrease from 2022, though, and the first decrease since 2019, when Beijing and Washington were engaged in a prolonged trade war.
However, there were also positive aspects in national exports. China registered a 69% surge with 101.6 billion USD in the total value of automobile exports during 2023, the highest among all categories. In terms of volume, China delivered 5.22 million cars during the year, a 57% increase over 2022. This is partially attributable to the explosive rise in electric vehicles sales. The country surpassed Japan to become the world’s largest car exporter, driven by strong demand in Russia and growing global appetite for EVs.
Another bright spot was from the photovoltaic manufacturing sector. The value of photovoltaic products exported by China hit a record in the first 10 months of 2023, reached about 43 billion USD during the first 10 months. The momentum would persist through the year, buoyed by higher demand amid a green energy transition worldwide.
Inflation
China’s 2023 consumer price index (CPI), the primary indicator of inflation, rose by 0.2% on a yearly basis. For 2023, China targeted its inflation rate by around 3%. However, during the year, contrasting with many other parts of the world where central banks are focused on controlling inflation, China struggled with falling prices, which even rose the fear of deflation pressures to the country.
2023’s overall CPI result can partly refute the alleged risk of deflation in China. Nevertheless, deflation concerns are anticipated to last until 2024 since there are not enough triggers to reverse the downward trend in house prices and demand.
Foreign direct investment (FDI)
China’s inbound foreign direct investment (FDI) fell in 2023 and reached multiyear lows. Following a modest gain in the first quarter of 2023, foreign investments into China suffered a decrease starting in April. According to data released by China’s Ministry of Commerce (MOFCOM), paid-in foreign investment dropped by 9.4% year over year to 987.01 billion RMB (around 139.4 billion USD), from January to October. Nonetheless, there were 41,947 newly registered foreign-invested enterprises nationwide, an increase of 32.1% year over year in this category.
Furthermore, several industries continued to see growth in foreign investment. In terms of industry, manufacturing sector consumed 283.44 billion RMB (40 billion USD) from foreign capital, representing a 1.9% annual rise. Out of this, the amount used in high-tech manufacturing rose annually by 9.5%. Service sector, meanwhile, experienced an annual reduction of 15.9% in the amount of foreign capital deployed.
In terms of investors, the paid-in investment of Canada, the UK, France, Switzerland and the Netherlands in China increased by 110.3%, 94.6%, 90.0%, 66.1% and 33.0%, respectively.
The decline in China’s FDI attraction in 2023 could indicate the situation that foreign investors are actively diversifying investment and sourcing away from China. Nevertheless, Chinese officials and analysts remain confident that China is still a top destination for global investors, thanks to measures to expand market access and improve the business environment. China’s top policymakers have made stabilizing foreign capital inflows a top priority for economic work in 2024 and pledged opening-up measures in several areas.
China’s removal of restrictions on foreign investment
In an effort to boost trust and draw in foreign investment, the Chinese State Council published the Opinions to Further Optimize the Environment for international Investment and Increased Efforts to Attract Foreign Investment (“Opinions”) on August 13, 2023.
The Opinions include 24 policy measures in six aspects, including lifting the quality of using foreign investment, ensuring equal treatment of domestic and foreign businesses, and increasing financial and tax support in a bid to enhance the business environment for foreign investors and boost foreign investor confidence amid an economic slowdown, bleak foreign investment outlook, and more challenging international trade environment.
Specifically, during the opening ceremony of the third Belt and Road Forum for International Cooperation on October 18, 2023, President Xi Jinping declared that China will remove all restrictions on foreign investment access in the manufacturing sector. Foreign investment in China is governed by the administration of the “Negative Lists,” which are periodically published by the Chinese government. The Negative Lists outline the sectors where foreign investment is either restricted or prohibited. Foreign investment in sectors not specified in the Negative Lists is subject to the same administrative measures as Chinese domestic investment, and no additional restrictions on market access will apply.
The most recent Negative Lists, released in 2021, featured two restrictions on the manufacturing sector to be mindful of:
- Print publications’ operations must be controlled by Chinese entities.
- It is prohibited for foreign investors to engage in steaming, stir-frying, moxibustion, calcination and other processing techniques for Chinese herbal medicines, as well as the production of confidential prescription products of proprietary Chinese medicines.
The move sends a clear message to all foreign investors, assuring them the same treatment as Chinese counterparts. It demonstrates China’s determination to promote continuously a high-quality opening-up. This action also marks a turning point and a new phase in the development of China’s manufacturing sector’s global competitiveness in an open environment.
The removal opens the door for foreign enterprises to establish or expand their manufacturing operations in China, increasing technology transfer and innovation as well as contribute to the integration of Chinese manufacturers into global supply chains.
China’s M&A activity set to rebound in 2024 with renewed interest from abroad
Key points:
- China’s announced M&A activities continue to reduce in 2023.
- Some deal activity, both inbound and outbound, was driven by businesses restructuring or realigning their priorities
- Government trade and investment restrictions imposed by both the U.S. and China could curb dealmaking, but actions f rom both sides have been measured.
- China’s M&A activity set to continue rebounding in 2024 with renewed interest from abroad, especially in the second half of the year as investors need time to observe macroeconomic situation.
China M&A activity has been on the decline for three years in a row, however, it still accounted for 41% of deals in the Asia-Pacific region in the first half of 2023, according to S&P Global. The world’s second-largest economy recorded 2,601 deals in 2023, with a combined value of 260.12 billion USD. This was an eight-year low in terms of deal volume, and a fourth straight year of decline in volume.
Market sentiment generally remained cautious amid the complex economic backdrop and slowing economic growth in China, but parties were on the lookout for opportunities that fit their strategy and risk profile. Deal activity was concentrated in key sectors including industrials; advanced manufacturing and mobility; financial services; and technology, media and telecommunications.
In 2023, a significant portion of M&A activity was generated by multinational businesses reevaluating their long-term strategies and restructuring aspects of their business to meet market challenges. These transactions reflect the role that the Chinese auto industry has come to play in cross-border M&A, especially as electric vehicles (EVs) gain market share, as well as in complementary sectors like renewable energy and battery technologies. Fueled by the U.S. Inflation Reduction Act’s clean energy tax incentives, Chinese companies with advanced EV-related technology have been making long-term investments in the West.
China’s M&A activity set to rebound in 2024 with renewed interest from abroad, but changes are predicted in business practices.
Despite a few lackluster years under its belt – China’s beaten down M&A market is still attracting attention and expectations from multinationals. While multinationals are interested in engaging, the market does need a few catalysts to reignite deal activity. The significant decline in equities, highlighted by a nearly 12% drop in the MSCI China Index in 2023, following substantial declines of 23.6% and 22.8% in 2022 and 2021, respectively, has severely impacted investor confidence. This decline in confidence is influenced by several factors, including declining consumer demand and ongoing tensions between China and the US, as indicated by current macroeconomic indicators. Investors closely watch China’s developments to assess its growth potential. Large investment deals, particularly those showcasing China’s market appeal and profitability, are vital for restoring confidence and encouraging increased capital allocation to the region. On the other hand, sellers also need to face the reality of today’s market, which is different from the double-digit growth in the past decades. Once there is alignment between buyers and sellers, growth expectations will narrow the valuation gap, which in turn will result in more deals being completed.
There has been a shift towards sectors that are less sensitive in nature, specifically away from real estate, and towards industries with potential technology-focused aspects. A big push is also seen in outbound environmental, social, and corporate governance, and new-energy deals. For instance, top solar panel producers in China are scrambling to get involved in new projects overseas either through M&A capital investment in the form of commodities, or equity, or through joint ventures.
As regulatory changes, uncertainty in the US – China tensions and other jurisdictions will continue to shape China’s M&A landscape, deal activity is forecasted to pick up only in the second half of the year, as investors wait to see how the macroeconomic situation in mainland China develops in the first half of 2024.
About this report
This report was compiled with contributions from the team of business experts in our China offices.
ARC Consulting, a division of ARC Group, is an advisory firm specialised in supporting western companies operating in Asia. Our mission is to bridge between the business ecosystems of Asia and those in Europe and the US. Our services cover market entry and expansion, production and sourcing, cross-border M&A as well as operational improvement and compliance.
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