China attracted the biggest share of FDI in 2020, despite the coronavirus pandemic. The mainland has been second to the US for a long time, but last year was a turning point when it overtook the US to take the top spot in FDIs. The United Nations Conference on Trade and Development (UNCTAD) said that China saw direct investments by foreign companies rise by four percent during the period. China was also the only major economy to avoid an economic contraction last year. It posted a gross domestic product growth of 2.3 percent in 2020. It is noteworthy that in 2020, East Asia alone accounted for one-third of the global FDIs. However, the ten-member ASEAN regional bloc saw FDI decline by 31 percent during the period. Similar to China, India too registered record highs last year when it comes to FDI. According to India’s Ministry of Commerce and Industry, during the second and third quarter of 2020, FDI inflows increased by $58.4 billion despite India recording the highest number of Covid-19 cases during that period.
In contrast, FDI in Latin America dropped by 37 percent during the same period. The European Union also suffered a 71 percent drop to an estimated $110 billion from $373 billion in 2019. Among the EU members, 17 of them registered a drop in FDI during the period. In the US, FDI inflows dropped 49 percent from over $250 billion in 2019 to $134 billion in 2020. According to UNCTAD, global FDI fell from $1.5 trillion in 2019 to just under $860 billion last year, which is a 40 percent decline. When it comes to Southeast Asia, the region registered a 31 percent contraction led by a 68 percent contraction in Malaysia, 50 percent in Thailand, 37 percent in Singapore, 24 percent in Indonesia, and ten percent in Vietnam.
UNCTAD said in its report, “FDI inflows to developed countries fell drastically by 69 percent to values last seen almost 25 years ago. Of the global decline of $630 billion, almost 80 percent was accounted for by developed economies. At an estimated $229 billion, inflows in developed economies were only one third of the low point after the global financial crisis of 2009. Multinational enterprises (MNEs) significantly reduced new equity investments. In combination with lower M&A activity this resulted in a market decline in the equity component of FDI to near zero. Intra-company loans turned negative (-$134 billion) as parent firms withdrew or were paid back loans from their affiliates, strengthening their balance at home. Contrary to earlier expectations and despite significantly lower profit levels, reinvested earnings in foreign affiliates remained relatively stable, declining by only 6 percent.”
China becomes the biggest recipient of FDI in 2020
Last year, China was the largest recipient of foreign direct investment in 2020 despite the coronavirus pandemic, which originated in the Chinese city of Wuhan in 2019. China attracted foreign direct investments worth $163 billion in 2020. The US, on the other hand, attracted FDI inflows of $134 billion only. In the previous year, the US registered $251 billion in inflows, while the mainland had received $140 billion. However, in 2020 China dethroned the US to take the top spot.
According to data compiled by the Organisation for Economic Cooperation and Development, the total stock of foreign investment remains much larger in the US when compared to China. It also must be noted that China recorded a decline in FDI inflows in the first quarter of 2020, however, growth soon picked up during the remaining three quarters of the year. According to data released by China’s Commerce Ministry, FDI inflows contracted by 11 percent in the first quarter, but it grew by 8.4 percent and 20 percent in the second and third quarter respectively.
When FDI in the US peaked in 2016 at $472 billion, China registered FDI inflows of $134 billion. Since then, investment in China has continued to rise. In contrast, investment in the US has fallen each year since then. Even more noteworthy, FDI flows into China’s IT services leaped by over 28 percent in 2020. The service sector in China registered the largest share of FDI in the same year. China’s cross-border merger & acquisition activity jumped by 54 percent during the period, mostly in China’s IT and pharma sectors. Foreign investment in China’s high-tech industries was also up by more than ten percent last year. The Netherlands and Britain increased their investment in China by 48 percent and 31 percent respectively during the period.
Nigel Green, the chief executive of deVere Group said, “China’s benchmark index the CSI 300, which tracks shares on the Shanghai and Shenzhen stock exchanges, jumped nearly two percent as investors around the world rush for exposure to the People’s Republic’s economic recovery from the Covid pandemic. These fresh impressive gains for Chinese equities come after an incredible year in 2020 in which the index added more than 27 percent.
“This trend of piling into Chinese stocks can be expected to continue throughout 2021 as investors seek growth. China’s rebound is quite remarkable, compared to other major economies, many of which are once again rolling out stricter restrictions to stop the spread of Covid amid a tsunami of new cases. The country has just reported increased industrial output and retail sales towards the end of 2020, bolstering expectations of further robust growth in 2021, adding fuel to the nation’s stock markets and currency as well as those economies that get a boost from domestic spending within China. Of course, all of this will not go unnoticed by investors looking for yield.
“But as 2020 showed us with perhaps too much clarity, things can change quickly and so-called ‘certainties’ can shift overnight. Therefore, as ever, it is essential that investors have a truly diversified portfolio. This includes across geographical regions, assets classes, sectors and currencies. A good fund manager that can secure global exposure and actively seek out opportunities in Asia, especially in China, will best position investors to reap rewards in 2021. China, but also Asia in general, has massive potential and will likely outperform the rest of the world in 2021. However, investors must not get giddy and forget about the importance of diversification – the investor’s best tool to capitalise on opportunities and mitigate risks.”
Building on an impressive performance in 2020, FDI into China continued to increase in January 2021. According to the Chinese Commerce Ministry, FDIs in January increased by 4.6 percent year-on-year to reach $14.2 billion. Data released by the ministry further revealed that foreign investment in the services industry amounted to ¥68.46 billion in January, which is an increase of around 11 percent year-on-year. The sector alone accounted for 74.7 percent of the country’s total FDI in January. Other sectors that also did well are wholesale and retail trade. These sectors saw FDI climb 27.2 percent year-on-year during the period. Also, the accommodation and catering industries witnessed a 71.5 percent increase in foreign investment.
According to the Ministry of Commerce, the services sector in China registered 11 percent rise in FDI amounting to $10.1 billion. Similar to January 2021, the services sector also attracted the largest share of FDI in 2020 as well. Last year, FDI in China’s service sector rose by 13.9 percent yearly to $120 billion and accounted for a record portion of overall FDI.
Global FDI is moving into Asia
Despite the pandemic and economic uncertainties, Asia has attracted the highest number of FDI last year, helped by China’s strong performance. Along with China, India too has posted positive FDI inflow growth. In India, the growth was driven by its fast growing service sector which has attracted a large list of foreign investors. Surging levels of FDI were also reported in the financial and science-based services and IT sectors. This is a result of large US multinationals entering the Indian sub-continent to tap into the potential of India’s vast domestic market as well as counter China in this aspect.
Asia is currently leading the global economy with FDI inflows either picking up or at least showing signs of a potential rise from last year’s negative growth patterns. In contrast, the European Union suffered a 71 percent drop in FDI last year. The UK and Italy, which have been hit hard by the pandemic and have recorded high mortality rates, attracted no new investments. Germany, which is the largest economy in Europe, saw a 61 percent drop in FDI inflows as well in 2020. Similarly, FDI inflows in Latin America also declined by 37 percent during the same period.
When it comes to the Association of Southeast Asian Nations (ASEAN) countries, their FDI inflows were largely negative last year, however, several of its member nations are getting back on track in attracting growing levels of FDI. This is attributed to the recently-agreed regional trade agreements. Leaders from ten Southeast Asian countries, as well as South Korea, China, Japan, Australia and New Zealand have signed a mammoth trade agreement that will define trade and commerce in the Asia Pacific (Apac) region for decades. Called the Regional Comprehensive Economic Partnership (RCEP), it’s a trade agreement signed by Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand, and Vietnam. It is noteworthy, that even though India was part of the initial negotiations, they decided to back out after growing pressure from the opposition and other stakeholders back home.
ASEAN’s FDI inflows slowdown
While China’s FDI inflow climbed four percent last year, the ten-member ASEAN regional bloc saw FDI declined by 31 percent, which amounts to $107 billion for 2020. According to UNCTAD’s Investment Trends Monitor, ASEAN saw growth of around $70 billion in greenfield investments last year. Interestingly, in 2019, ASEAN registered a decline of 14 percent when it came to greenfield investments.
The levels of FDI inflows do vary from country to country. Some countries did register a far greater drop in FDI inflow last year when compared to other ASEAN members. Vietnam too registered an FDI inflows drop of around ten percent in 2020 to around $20 billion for the year, when compared to its FDI inflows in 2019.
According to UNCTAD, Singapore’s FDI inflows plunged by 37 percent last year amounting to $58 billion. Despite a plunge, which is similar to levels during the financial crisis of 2009, Singapore still held pole position as ASEAN’s largest recipient of foreign investment in 2020.
Indonesia also registered a drop in FDI inflows by 24 percent in 2020, according to Indonesia’s Investment Coordinating Board. FDI inflow in Indonesia last year amounted to $18 billion. This is mainly because of the widespread lockdown measures introduced to curb the spread of the virus during the first half of last year. FDI inflows in Indonesia have picked up since then, rising by a yearly 1.1 percent during the third quarter of 2020. FDI inflows registered strong growth in the fourth quarter as well, rising by nearly 5.5 percent. A major chunk of the funds came from investors in China and Singapore. The sectors that attracted these FDI were telecoms, transportation, warehousing and utilities.
The UNCTAD report further revealed that Thailand and Malaysia were especially negatively impacted when it came to FDI. However, Malaysia’s Department of Statistics argues that by taking account of an alternative measure, in the form of ‘gross FDI inflows’, then for the first nine months of 2020, investments into Malaysia were up by 5.8 percent on the previous year, amounting to $26.8 billion in that period. Malaysia’s FDI inflow did register growth in the fourth quarter reaching $1.5 billion as a result of the lifting of its restrictions and lockdown measures previously introduced. This proves that Malaysia continues to be a major investment destination and attract global investors. Most of the foreign investments came into the country from its neighbouring countries such as Thailand, Singapore and Japan. A major chunk of the investments went to the manufacturing, finance and retail trading sectors.
One country that did well compared to the other ASEAN members, is the Philippines. The country registered an increase in inward direct investment of 29 percent to $6.4 billion during the period. The Philippines’ impressive performance was the result of surging net equity capital investments which rose by 48.6 percent during the first 11 months of 2020. Sectors such as manufacturing, banking and insurance, and property attracted the major portions of the funds, which came from investors in countries such as Japan, Singapore, the Netherlands, and the US.
India to emerge as China’s potential challenger
Similar to China, India also registered high FDI records in 2020. According to India’s Ministry of Commerce and Industry, during the second and third quarter of 2020, FDI inflows increased by $58.4 billion despite India recording the highest number of Covid-19 cases during the period. This is a 22 percent increase in FDI inflow when compared to the same period in 2019. It is the highest ever recorded during the first eight months of a financial year. The ministry further revealed that around $43.8 billion were invested as equity capital alone. India and China were the only two countries that registered FDI growth last year.
During the month of November, India recorded a growth of 81 percent year-on-year, which stood at $10.2 billion. Around $7.6 billion went to sectors such as banking, finance, insurance, R&D, testing and analysis and outsourcing, while around $7.4 billion went towards computer hardware and software. Other sectors that also benefited from strong FDI include retail and wholesale trade, telecoms, tourism and automobile production. According to the UNCTAD report, India is attracting record numbers of deals in IT consulting and digital sectors, including e-commerce platforms, data processing services and digital payments.
A major portion of FDI inflows in India came from Singapore. It contributed around $8.3 billion to India’s FDI inflow in 2020. Singapore was followed by the US in second, which overtook Mauritius, investments totaling $7.12 billion. US technology giants buying up Indian tech ventures helped the US topple Mauritius and take the second spot. The US was also helped by former US President Donald Trump’s relationship with Indian Prime Minister Narendra Modi.
Other countries that also made significant contributions include the UK with $1.35 billion FDI and France with $1.13 billion. Also, holding company jurisdictions, notably the Cayman Islands and the Netherlands, contributed $2.1 billion and $1.5 billion in FDI inflow respectively. India was helped by FDI policy reforms made by the government to boost FDI amid a global recession. Other factors that also helped India include investment facilitation and ease of doing business. Like China, India also has a big service sector that attracts foreign investors at a very large scale. This could possibly mean that India could be China’s worthy competitor when it comes to competing for FDI, and not the US. The very fact that the US’s FDI inflows dropped by 49 percent in 2020 and has been declining in the last couple of years, whereas India’s FDI inflows grew 22 percent year-on-year during the first eight months of the financial year proves it.