China's FDI Slump
Foreign investment into China is shrinking. From January to May 2025, China received ¥358.2 billion (~US$50 billion) in foreign direct investment (FDI)—a 13.2% drop from the same time last year, which itself had already seen a sharp 28.2% fall. This marks two years of weakening investor confidence, driven by growing tensions with the U.S., ongoing tariffs, and the rising trend of international companies moving operations out of China—a shift often called the “China Exodus.”
Despite this, over 24,000 new foreign-invested companies were set up in the same five-month period, a 10.4% increase. Most investment is going into high-tech areas like e-commerce, aerospace, and pharmaceuticals. To slow the outflow and keep existing investors engaged, the Chinese government has introduced a new tax incentive: foreign companies that reinvest their China-based profits into approved sectors can deduct 10% of that amount from their corporate tax bill. The policy applies retroactively to January 2025 and runs through 2028. Together with relaxed restrictions and streamlined approvals, China hopes to show it is still open for business and attractive to international capital.
Base Case – Gradual Stabilization (55%)
In this most likely scenario, the reinvestment credit halts the sharp decline in FDI but doesn’t spark a dramatic recovery. Companies already in China—particularly those with steady cash flows and long-term plans—choose to reinvest earnings into core operations or partnerships. New investment remains subdued, as global firms continue diversifying supply chains due to geopolitical caution and economic uncertainty. Annual FDI levels in 2025 settle around ¥720–750 billion, modestly up from early-year levels, with a slight upward trend into 2026.
The policy provides breathing room but doesn’t fully restore confidence. China maintains relevance as a manufacturing and tech base, especially in advanced industries, but no longer commands the dominant FDI magnetism of the 2010s.
Upside Scenario – Confidence Rebuilds (25%)
In this more optimistic outlook, the tax incentive is supported by broader reforms: regulatory transparency improves, intellectual property protections are enforced, and local government support accelerates reinvestment approvals. The global economy also steadies, and relations with key partners like the EU and ASEAN stabilize.
Foreign firms begin treating China not just as a market, but again as a long-term hub. Investment picks up, especially in high-growth sectors like green energy, semiconductors, and medical tech. FDI tops ¥850 billion in 2026 and pushes toward pre-pandemic highs by 2027. China regains ground in global FDI rankings, perhaps climbing back to the top 3 in investor confidence indices.
Downside Scenario – Investor Withdrawal Continues (20%)
In the worst-case scenario, external pressures—such as new U.S. sanctions, conflict over Taiwan, or further crackdowns on foreign data access—undermine trust in China’s investment environment. The reinvestment tax credit is underused, bogged down in administrative complexity or political favoritism. Prominent multinational exits dominate headlines, further spooking investors.
FDI drops below ¥650 billion in 2026, and the “China Exodus” narrative hardens into reality. ASEAN and India absorb a larger share of global investment, and China increasingly relies on state-directed capital and domestic firms to fill the gap. The economic ripple effect dampens growth and puts further strain on employment and innovation goals.
