What is China Considering by Re-emphasizing the Attraction of Foreign Investments?

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At this year’s Third Plenum, much attention was drawn to the frequent mention of “security” in the post-meeting communiqué, leading some to believe that the government is shifting its focus from economic growth to national security. However, the words “reform” and “opening up” appeared far more frequently than “security.” Additionally, the communiqué revived a long-absent term—”foreign investment.” The 18th and 19th Third Plenums did not mention foreign investment, so its re-emergence is a noteworthy signal for investors.

Over the past year, the central government has introduced a series of measures aimed at re-attracting foreign investment. In August 2023, the State Council issued “Opinions on Further Optimizing the Environment for Foreign Investment and Increasing Efforts to Attract Foreign Investment,” outlining multiple approaches to make it easier for foreign investors to do business and invest in China. In October 2023, at the Third Belt and Road Forum, the government also announced the removal of restrictions on foreign investment in manufacturing, effectively opening all sectors to foreign investors (previously, there were still significant restrictions in areas such as publishing and traditional Chinese medicine). Furthermore, to make it easier for foreign businesspeople to enter the country, the Ministry of Foreign Affairs announced visa-free entry for citizens of six countries, including France, Germany, and Italy, in November last year, along with a general relaxation of visa application and transit visa policies for other passport holders. It is clear that the re-emphasis on foreign investment at this year’s Third Plenum is not an isolated event; the government had laid considerable groundwork beforehand. Against the backdrop of sluggish economic growth and weak private investment, the importance of retaining and attracting foreign capital has significantly increased.

Foreign investment has played an indispensable role in China’s rapid development over the past half-century.

In the early stages of China’s opening up, foreign investment represented the most advanced technology. Foreign companies brought to China their advanced experience in building factories, production, management, and new business models while investing in the country. For foreign investors, China offered not only cheap labor and a vast market but also tax incentives from both central and local governments eager to attract foreign capital. Initially, the influx of foreign investment was concentrated in manufacturing, gradually expanding to consumer goods industries such as food, beverages, home appliances, and automobiles. For a long time, China held a leading position globally in receiving foreign direct investment (FDI).

Before 2000, the average annual growth rate of foreign investment in China exceeded 20%. From 2000 to 2010, this growth rate slowed to around 10% annually, but considering the base effect, this was still rapid growth. After 2010, the growth rate of foreign investment slowed to single digits. By 2023, China’s net outflow of FDI reached $152.5 billion, and the actual use of foreign capital nationwide fell by 8% compared to 2022.

In fact, the exodus of foreign capital began before the pandemic, but the sharp decline in 2023 brought it to widespread attention. Before the pandemic, foreign investment shifts were primarily driven by cost considerations—as labor and land costs in China increased, global supply chains began to shift towards more affordable regions in Southeast Asia, Latin America, and Africa. After the pandemic, the outflow of foreign capital accelerated, driven more by strategic reasons such as geopolitical tensions and concerns over supply chain security.

Foreign investment relocations motivated by cost considerations are a natural outcome of economic development. This type of foreign capital, typically in labor- and resource-intensive industries, may help accelerate China’s industrial upgrading as low-end manufacturing relocates abroad. However, China does not wish to see an overly rapid exodus of manufacturing, as the supply chain is interconnected, and the rapid departure of low-end manufacturing could also impact the Chinese economy.

Strategic relocations of supply chains, on the other hand, stem from many Western countries’ reflections during the pandemic. They began to rearrange their global supply chains, with key segments even being repatriated. Additionally, the US has imposed restrictions on investments involving China amid China-US tensions, prompting some foreign investors to partially withdraw to mitigate risks. This type of foreign capital exodus poses a more significant challenge to the Chinese economy.

Why is the Chinese government reviving the focus on foreign investment?

As China’s economic growth slows, the government is seeking various engines to drive the economy, and foreign investment is one of the crucial forces. In 2022, foreign companies accounted for 33% of China’s total imports and exports. They also contributed one-sixth of tax revenue and 10% of urban employment. Furthermore, employees of foreign companies generally earn higher incomes than the national average, meaning this population also has relatively stronger consumption power.

Moreover, China’s industrial upgrading cannot occur without the technology and management expertise brought by foreign companies. A typical example is Tesla’s entry into China, establishing a Gigafactory in Shanghai, which spurred industry competition. China’s electric vehicle companies have made continuous breakthroughs in areas like autonomous driving, range, and smart features, partly due to the “catfish effect” of Tesla.

At the same time, we believe China remains attractive to foreign investors. Although the cost advantage has diminished, China still boasts the world’s most complete, mature, and responsive industrial supply chain, along with a large pool of high-quality labor. China’s market is highly competitive, requiring foreign companies to excel not only in R&D and quality compared to domestic competitors but also in speed. However, China’s market is also vibrant, with advanced industries offering more growth opportunities than most overseas markets.

While economic slowdown and geopolitical factors will continue to influence foreign companies’ decisions regarding their presence in China, we believe that when the Chinese government demonstrates sincerity and makes concerted efforts to attract foreign investment, there is a greater chance for positive changes to occur.

Disclaimer

This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each Fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice. This material is issued by Zeal Asset Management Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.

There can be no assurance that any estimates of future performance of any industry, security or security class discussed in this presentation can be achieved. The portfolio may or may not have current investments in the industry, security or security class discussed. Any reference or inference to a specific industry or company listed herein does not constitute a recommendation to buy, sell, or hold securities of such industry or company. Please be advised that any estimates of future performance of any industry, security or security class discussed are subject to change at any time and are current as of the date of this presentation only. Targets are objectives only and should not be construed as providing any assurance or guarantee as to the results that may be realized in the future from investments in any industry, asset or asset class described herein.

In respect of any discrepancy between the English and Chinese version, the English version shall prevail.

Chinese Companies Secretly Holding Global Leadership Positions

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The Paris Olympics have begun, and Hong Kong’s athletes have shone in fencing, quickly securing two gold medals. The fencing craze ignited by Cheung Ka-long’s victory at the Tokyo Olympics three years ago may reach new heights after the victories in Paris.

Fencing, originating in Renaissance Europe, is an ancient sport. Delving into the history of fencing reveals that it is also the sport in which the host country France has won the most Olympic medals. It’s one of the few sports in international competitions where the official officiating language is French.

Another surprising discovery is China’s significant presence on the contemporary fencing medal table. Despite not having the historical, cultural, talent, or training infrastructure advantages of European countries, China’s Olympic results are impressive. Chinese athletes won 1 silver and 1 bronze at the 2000 Sydney Olympics, 3 silvers at the 2004 Athens Olympics, 1 gold and 1 silver at the 2008 Beijing Olympics, 2 golds and 1 bronze at the 2012 London Olympics, 1 silver and 1 bronze at the 2016 Rio Olympics, and 1 gold at the 2020 Tokyo Olympics. Among the world’s top 100 male and female fencers, China has 29 athletes across épée, foil, and sabre events, compared to France’s 52. This is a surprise to many.

Fencing was formally introduced to China only in 1955. A pivotal moment was when female fencer Luan Jujie won gold at the 1984 Los Angeles Olympics. Since then, fencing has gradually gained popularity in China. To cultivate better fencers, the Chinese fencing team implemented several reforms, such as hiring European coaches. Unlike athletics and swimming, where athletes are primarily sourced from specialized sports schools, fencing mainly relies on clubs to train potential athletes. Outstanding fencers can be selected for the national team. Moreover, the success of Chinese athletes in international competitions has inspired more children to participate in the sport, which in turn, trains more talent reserves for the sport.

In the Chinese stock market, there are industries and companies that, much like Chinese fencing, have quietly risen over the past 10-20 years and held global leadership positions unbeknownst to outsiders.

For example, the global smartphone market is very competitive, yet the general public often only sees the competition among well-known brands, paying little attention to components providers. Microphones and speakers are essential components of smartphones. In this field, Chinese companies hold a near-monopoly position, with more than one highly competitive company. One company in Jiangsu, having risen early, opened up the global market with its advanced technology and product quality, with its products found in one out of every three smartphones worldwide. Another emerging company is not only catching up in the field of miniature speakers and microphones but also actively developing wearable smart devices. Its acoustic components currently hold a 70% market share in high-end virtual reality headsets globally.

Similarly, many people know China’s leading position in electric vehicles (EV), but few are aware of China’s strength in automotive lenses. One of our investment cases is an optical product manufacturer founded in the 1980s, which has ventured into smartphone lenses, automotive lenses, AR, and VR over the past 30 years. As the world’s largest supplier of automotive lenses, it holds over a 30% market share. Its rival company, a camera module manufacturer founded in the early 2000s, has also become an industry leader within just 10 years. Beyond smartphone and tablet lenses, this company has increased its focus on automotive lenses in response to changing industry dynamics. Major EV companies are diving into the development of autonomous driving, in which automotive cameras are indispensable. New cars with smart driving features are equipped with at least five cameras, with leading Chinese EV companies like NIO, Li Auto, and Xpeng equipping over ten cameras for their autonomous driving systems. Under such circumstances, the demand for automotive lenses is expected to rise.

These companies, though in different industries, can generally be categorized under consumer electronics. China’s rapid urbanization and growth in per capita disposable income over the past few decades have driven the demand for consumer electronics, supporting the industry’s rapid expansion. Facing the intense competition in the domestic market, companies are willing to increase their R&D investment, making Chinese consumer electronics products more diverse, competitive, and faster in iteration.

In fact, besides consumer electronics, China has quietly caught up in many other advanced manufacturing areas, such as EVs, solar panels, lithium batteries, semiconductors, and biotech. China’s position in the global industrial chain is steadily rising. This trend is evident in export structures over the past ten years: the proportion of labor-intensive goods in total exports has declined, while capital- and technology-intensive products have meaningfully increased. With the Chinese government’s continued emphasis on economic restructuring, industries driven by technology, R&D, and consumption are expected to have greater development opportunities.

Disclaimer

This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each Fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice. This material is issued by Zeal Asset Management Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.

There can be no assurance that any estimates of future performance of any industry, security or security class discussed in this presentation can be achieved. The portfolio may or may not have current investments in the industry, security or security class discussed. Any reference or inference to a specific industry or company listed herein does not constitute a recommendation to buy, sell, or hold securities of such industry or company. Please be advised that any estimates of future performance of any industry, security or security class discussed are subject to change at any time and are current as of the date of this presentation only. Targets are objectives only and should not be construed as providing any assurance or guarantee as to the results that may be realized in the future from investments in any industry, asset or asset class described herein.

In respect of any discrepancy between the English and Chinese version, the English version shall prevail.