Emerging Dynamics and Future Trajectory of Cross-Border Foreign Capital Flows

Foreign capital constitutes a vital force in participating in the economic cycles of major countries, and serves as a key barometer for observing their economic transformations. Foreign capital in China includes both foreign direct investment (FDI) and foreign funds participating in investments in the domestic capital markets.  Since 2024, foreign investment in China has experienced significant fluctuations, with withdrawal by some prominent enterprises drawing substantial market attention. Although the latest round of the US tariff tension has eased, its impacts may still influence the future allocation of foreign capital in China. Nonetheless, the recent dynamics of foreign capital in China present both opportunities and challenges. The continuous improvement of China's opening-up framework, coupled with the accelerated implementation of sector-specific liberalization measures, is generating institutional dividends that can largely mitigate adverse impacts. As external shocks interact with domestic "positive" factors, the long-term trajectory of cross-border foreign capital flow is expected to remain stable and positive.

New Features in Recent Foreign Capital Inflows to China

While the actual amount of utilized FDI has declined in recent years, the number of newly established foreign-invested enterprises has grown steadily, and the FDI structure has undergone further optimization. According to the data of the Ministry of Commerce, in 2024, China's actual use of FDI was 826.25 billion yuan, a year-on-year decrease of 27.1%. Notably, however, 59,080 new foreign-invested enterprises were established nationwide, with a year-on-year increase of 9.9%, indicating that the cumulative effects of recent policy measures to stabilize growth and FDI are gradually emerging. Concurrently, the composition of FDI was further optimized. The actual use of FDI in high-tech manufacturing was 96.3 billion yuan, accounting for 11.7% of the total. Specifically, FDI in medical equipment and instrument manufacturing, professional and technical services, and computer and office equipment manufacturing increased by 98.7%, 40.8% and 21.9% respectively. These figures reflect a growing focus of foreign investment on sectors tied to China's new productive forces, with deeper engagement in China's high-quality development. According to the September 2024 China Business Environment Survey Report released by the US-China Business Council, fewer than one-fifth of surveyed enterprises reported having moved or planned to move some businesses out of China. Almost all respondents viewed the Chinese market as a critical component of their global layout.

Foreign capital flows in the financial markets have gradually stabilized, with reduced pressure on capital outflows. In the bond market, overseas institutional and individual holdings of domestic bonds have halted their decline and rebounded since October 2023. By the end of March 2025, such holdings reached 4.4 trillion yuan, an increase of 1.1 trillion yuan from the end of October 2023 registering a new historical high. In the stock market, after cumulative net inflows via Stock Connect peaked at 1.9 trillion yuan in August 2023, foreign capital entered a five-month period of fluctuating flows. Since 2024, stock market volatility has been partially influenced by non-economic factors. For example, some state governments in the US required public pension funds to divest from Chinese-funded enterprises on the grounds of "national security risks", causing short-term capital outflows. However, as the temporary impact of such non-economic factors diminished, economic fundamentals will regain long-term dominance. With domestic stock market valuations currently at historic lows and continuous improvements in the capital market's institutional environment, the market's attractiveness to foreign capital is set to grow steadily. China's top-level design for opening-up has been continuously refined, with policy implementation accelerating. In September 2024, the National Development and Reform Commission issued the Special Administrative Measures for Foreign Investment Access (Negative List) (2024 version), which comprehensively eliminated restrictions on foreign investment in the manufacturing sector and further reduced the negative list for service industry opening-up, effective November 2024. In the capital market, the "swap connect" was officially launched in May 2023, enabling foreign investors to manage interest rate risks through domestic RMB interest rate swaps. In January 2024, the Hong Kong Monetary Authority (HKMA) announced that the RMB treasury bonds and policy bank bonds under the "bond connect" northbound channel would be included in the eligible collateral list for RMB liquidity arrangements.

Key Drivers of Shifts in Foreign Capital Flow

First, the global supply chain has been restructured, resulting in a "two ends transfer" trend in international capital. On the one hand, as China's labor cost advantage diminishes, comparative advantages in related industries such as food, beverages, tobacco, apparel, bags and suitcases, and instruments/equipment have weakened. In contrast, countries in Southeast Asia and South Asia, including Vietnam, Cambodia and India, have rapidly emerged as new "cost depressions", leveraging their rising competitiveness to attract substantial low-end value chain capital inflows and absorb large-scale international investments. On the other hand, driven by strategic containment objectives, the US has sought to marginalize China from high-end industrial supply chain networks. The US government has managed to introduce multiple legislative acts, including Chips and Science Act in August 2022, which prohibits companies receiving federal funds from significantly expanding advanced semiconductor production in China for a decade. This has prompted other developed economies to introduce similar industry-specific policies aimed at retaining capital domestically, including the EU's Chip Act, Net Zero Industry Act, and South Korea's special semiconductor legislation. These discriminatory industrial policies not only undermine the stability of global supply chains, but also affect the stability and prospects of China's cross-border capital flows.

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