China's new growth strategy

China wants to be less dependent on Western technologies and markets and is therefore restructuring its economy.

Tommy Wu

Commerzbank Economic Research

January 26 2024

China is striving to reduce its dependence on Western technologies and markets. In addition to rising competition from Chinese corporates, national security concerns as well as trade and investment restrictions from both sides are creating a new set of challenges for Western corporates. Meanwhile, China's renewed focus on manufacturing may help it overcome some of its own challenges, but such supply-side strategy may not be met by enough domestic and global demand.

The Chinese economy lost its main growth engine...

The Chinese leadership has to cope with the effects of the deflating real estate bubble and local government debt clean-up. With the end of the construction boom, China's economy lost its most important growth driver and is currently going through restructuring. It will take time for the emerging industries such as tech, new energy, advanced manufacturing, and biological engineering to replace the property sector. The emerging industries together account for about 13% of GDP, according to the Chinese government. That is, compared to the property sector which at one point accounted for about a quarter of GDP directly (through construction) and indirectly (through upstream and downstream industries such as construction materials and home appliances).

... and foreign investors their enthusiasm

In addition, China has lost favor with Western investors as a location for direct investment.

Western companies have long been concerned about their ability to compete fairly in the Chinese market. They are also worried about Chinese regulations on cross-border data transfer which keep data from leaving the Chinese borders, as well as China's newly revised Counter-Espionage Law which may give the Chinese government more access to, and control over, corporate data. On the latter, the worry is that what companies considered normal business activities, such as market research, could become criminal activities. Crackdown on Western consultancies over Chinese national security concerns has been hampering foreign investment. More generally, reduced transparency of policymaking and regulatory uncertainty over data transfer, cybersecurity, and national security have made it harder for foreign firms to navigate Chinese markets. This already had significant effects on foreign direct investments (FDI) in China.

There are two official data series on FDI, which differ in several respects. The most important difference is that the figures from the Ministry of Commerce (MofCom) only show gross inflows and do not take into account investments in the financial sector, reinvested earnings, and some other items. The FDI data from the current account (balance of payments), on the other hand, is a net figure, i.e. the balance of inflows and outflows of inward FDI:

  • MofCom figures show a 10% decline in (gross) FDI in dollar terms in 2023, the biggest drop since the global financial crisis (Chart 1).
  • The balance of payments data is more spectacular. They show a net outflow in the third quarter of 2023 for the first time in the data history. This was likely caused by foreign companies having withdrawn their direct investment from China.