China Unveils Incentives to Boost Slumping FDI and Reinvestment

China has introduced measures to incentivize foreign investors to reinvest profits within the country, responding to a notable decline in foreign direct investment (FDI) inflows during the first half of 2025. These initiatives, outlined in a joint notice from key government bodies including the National Development and Reform Commission, the Ministry of Finance, the Ministry of Commerce, and the People's Bank of China, aim to reverse the downward trend by facilitating reinvestment through various channels.

The specific measures include:

Permitting foreign investors to establish new enterprises, expand capital in existing operations, or acquire equity in domestic firms using reinvested profits.

Providing tax incentives for foreign entities that reinvest earnings generated in China.

Directing local governments to create dedicated project databases for foreign reinvestment opportunities and enhanced project support services.

Allowing flexible land use options, such as long-term leasing of industrial land or lease-before-transfer arrangements, to lower associated costs.

Streamlining approval processes for foreign shareholder loans and issuing Panda Bonds to support eligible reinvestment activities.

Encouraging financial institutions to innovate products and services tailored to foreign enterprises' reinvestment needs.

This policy response occurs against a 13.2% year-on-year decline in FDI from January to May 2025, with inflows totaling 358.2 billion yuan (approximately $50 billion). Broader analyses indicate that the slump is largely attributable to cyclical factors, such as elevated global interest rates leading to increased debt repayments by foreign firms, reduced reinvestment of earnings, and declines in financial sector investments like offshore IPOs and private equity. Sector-specific challenges, including real estate and traditional manufacturing adjustments, have also contributed, exacerbated by rising U.S.-China trade tensions and tariffs, dampening investor confidence. Net FDI inflows under balance-of-payments metrics fell sharply from $344 billion in 2021 to $18.6 billion in 2024, with occasional quarterly net outflows.

Despite these challenges, China has surpassed its FDI target for the 14th Five-Year Plan (2021-2025) ahead of schedule, accumulating $708.73 billion by June 2025 against a goal of $700 billion. This achievement reflects robust gross utilized FDI, which stood at $116.2 billion in 2024, and a shift toward higher-quality investments, with high-tech industries attracting 34.6% of inflows in 2024, up from 28% in 2020. Over 229,000 new foreign-invested enterprises were established during the plan period, contributing significantly to foreign trade (one-third), industrial output (one-fourth), tax revenues (one-seventh), and employment (over 30 million jobs).

Policy efforts to stabilize FDI extend beyond the recent notice, including earlier actions in February 2025, such as a 10% tax credit on reinvested profits, shortening the negative list for foreign investment to 29 items, and expanding the catalogue of encouraged industries.+2 更多 Additional steps involve supporting foreign R&D centers, streamlining cross-border data flows, and local incentives like rewards for high-tech manufacturing investments. While surveys indicate persistent concerns over growth uncertainties and geopolitical risks, these measures leverage China's advantages, including its vast market and supply chains, to potentially restore investor sentiment and sustain FDI in strategic sectors.

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