Editor's note: This analysis is written by Wang Jianhui, the general manager of the research and development department at Capital Securities, about his latest insights on the Chinese economy. The article reflects the author's opinions and not necessarily the views of CGTN.

According to the World Investment Report 2023 issued recently by the United Nations Conference on Trade and Development (UNCTAD), foreign direct investment (FDI) flows to China, the second largest economy in the world, have reached a record high of $189 billion last year, making the nation the second-largest host of foreign investments since 2017. It is, from the long-term view, more exciting to witness that the share of FDI flows to China surged from less than 3 percent to 14.6 percent, and FDI volume which increased by 7 percent annually expanded within the last two decades, while the yearly global flows remained at an average of $1.4 trillion. The report objectively attributed the marvelous score to accommodative policy measures such as the facilitation of trade and investments, and the opening to new sectors, during the hardship that many felt throughout the COVID-19 pandemic. This could be better understood if elaborated a little more.

In recent years, China issued and enacted the Foreign Investment Law, granting foreign businesses "national treatment" and played its part in the entry into force of the Regional Comprehensive Economic Partnership (RCEP) agreement, which has created the world’s largest free trade zone. Thanks to the simplification of processes and paperwork, the lead time for clearing customs has been cut by 67 percent (inbound) and 92 percent (outbound). The overall tariff rate has been lowered from 9.8 percent to 7.4 percent. As a result of streamlining, the number of investment items subject to central government approval has been slashed by over 90 percent. Only 10 categories of industrial production permits, instead of the 60 previously, are currently required, and the approval time for construction projects has been cut to no more than 120 working days. Items on the negative lists for foreign investment covering the whole country and pilot free trade zones were reduced by 51 percent and 72 percent, respectively. All barriers for the entire manufacturing sector were generally lifted and opening-up in the finance and other service sectors was continuously enhanced. 

Besides the foreign investment-specific measures, supportive but sustainable macroeconomic policies are also major factors to ensure, directly or indirectly, the viability, safety, and eventual profitability of FDI. For years, the government has been able to maintain the soundness of fiscal policy with a deficit-to-GDP ratio remaining at around 3 percent most of the time. The foreign exchange reserve has been stable at over $3 trillion, and the external debt servicing ratio has been ranging between 5 percent and 6 percent, much lower than the "alerting level" of 20 percent. Monetary policy has been accommodative with the M2 (a broad measure of the money supply) growth at 11 percent to 12 percent and leading interest rates (Shanghai Interbank Offered Rate, or SHIBOR overnight) around 2 percent. All that makes credit and funds more accessible and affordable for both foreign and domestic enterprises. By the end of 2022, the manufacturing sector, where a significant portion of the FDI flowed to, obtained a total loan of 27.4 trillion yuan compared to 16.3 trillion yuan in the previous year, and the average interest was down by 1.5 percentage points. The foreign exchange rate of the renminbi to the U.S. dollar remained within the range of 6.3:1 to 6.7:1 last year. With additional incentives such as tax refunds up to 17 percent, the foreign trade generated by the foreign-invested businesses has reached 2.08 trillion dollars, accounting for one-third of the national total.

We may get a clear picture of the future trend of FDI into China based on the performance of the last decade and the ongoing policy promotions. For instance, Hainan free trade port and China's joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). One trend we can expect is the further diversification of the economy. The market share of the manufacturing sector declined from 45 percent to 19.4 percent; share of real estate sector from 23.2 percent to 13.6 percent, while that of lease and commercial services, wholesale, and retail increased. In addition, more industries would be opened up to foreign capital, such as in the fields of science research, technological services, information transmission, and computer and software services, which have been ongoing. Their shares among the total flows to China have grown. Speaking in overall terms, the FDI into China still has a huge space to grow in the decades to come. While the global average of FDI flows to total capital formation ratio is 7.4 percent, and FDI stock to GDP ratio is 37.7 percent; those numbers are only 2.9 and 12 percent, respectively, in China.