China Takes The FDI Title

China surges past the U.S. as the top destination for foreign direct investment.

The US struggled to contain Covid-19. China, after a slow start, managed to quickly get it under control. So where did foreign investors place their bets in 2020?

The answer appears in a new report from the United Nations Conference on Trade and Development. While foreign direct investment (FDI) in the US plummeted 49% to $134 billion, China recorded a 4% surge to $163 billion, winning for the first time the title of largest recipient of inflows globally.

While the shift in global asset allocation to China was widely anticipated and consistent with trends of the past 10 years, the symbolic blow to the US—ranked first for decades—is significant.

The implications are not only economic but political and cultural, according to Chris Rowley, visiting fellow at the University of Oxford’s Kellogg College: “This development can be put into the context of the waning of Pax Americana and emergence of Pax Sinica.” Not only is Beijing projected to attract even more foreign capital in the future, but it is leveraging its own investments abroad to bolster Chinese growth and global influence.

China might not be the only beneficiary of the Covid-19 precipitated economic disruption, however. FDI fell 42% across the globe last year, the UN report shows; and the decline mostly occurred in developed nations, which sustained a 69% drop to $229 billion, the lowest level in a quarter century. East Asia, including China, established itself as the largest host region, accounting for one-third of total international FDI.

China’s neighbors will try to take a piece of the multibillion-dollar pie, Rowley suggests. “The key question should not be the size of the investment per se, but investment in exactly what—such as hi-tech, innovative and financial sectors—and for what returns?” he says. Successful investment in these industries requires not only knowledge, agility, openness and collaboration, but ample critical thinking and the protection of intellectual property rights.

“This is the ‘elephant in the room’ of China’s rise to FDI preeminence,” says Rowley. “Without all that, in the future, other Asian destinations may well come to be more attractive for foreign investors.”