China steps up foreign investment drive amid growing trade tensions
China has stepped up efforts to attract foreign investors, as policymakers look to bolster the domestic economy and safeguard its position in global supply chains amid negotiations with major trade partners.
New tax breaks unveiled this week aim to encourage foreign firms to reinvest profits locally – part of a broader effort to restore confidence and signal openness as challenging trade talks continue with the European Union and United States.
The Ministry of Commerce, the Ministry of Finance and the State Taxation Administration jointly announced the new incentives in a statement on Monday.
Foreign companies that choose to reinvest profits earned in China back into local operations will be able to deduct their onshore tax by an amount equivalent to 10 per cent of the reinvested sum. Any unused credits can also be carried forward until the end of 2028.
Eligible reinvestments include capital injections into domestic firms, such as establishing new entities or acquiring equity from non-affiliated parties – though purchases of publicly listed shares are excluded.
Foreign investors can also apply retroactively for qualifying reinvestments made since January 1, 2025.
'It's a clear contrast – while the US is threatening trading partners with tariffs, China is offering tax relief to attract foreign investment,' said Sun Lijian, a finance professor at Fudan University in Shanghai.
'A range of opening-up policies that China has adopted in recent years, including visa-free travel arrangements, aim to encourage more foreign investors and businesses to integrate into China's economic system,' he added.Remitting profits made in China back to home countries requires approval by the State Administration of Foreign Exchange (SAFE) and is also subject to taxation.
Foreign firms have long reinvested profits to expand their operations in the country, but geopolitical tensions have dampened sentiment in recent years. China experienced a net capital outflow of US$168 billion in 2024 – the highest since records began in 1990, according to calculations by Bloomberg.
As uncertainty rises, global investors are holding onto their cash in a climate where a better business environment matters more than ever, Sun said.
The new tax incentives came at a delicate time for China as it negotiates trade terms with the European Union – its second-largest export destination – and the United States, its third-largest.
Foreign investment remains vital to China, providing jobs, technology and management expertise, and is essential to the country's broader ties with major trading nations Speaking at the World Economic Forum's Annual Meeting of the New Champions in Tianjin last week, China's Premier Li Qiang pledged to 'open the door wider to the world.' 'We will further integrate and connect with the global market, step up industrial collaboration with other countries and actively share the fruits of our development to deliver greater benefits to the world,' he told hundreds of executives.China remains the world's second-largest recipient of foreign investment, but the amount has fallen as competition with the US intensifies.
Washington has imposed tech curbs and higher tariffs on Chinese products, and rolled out tax incentives to lure American firms – particularly manufacturers – back to the United States.
From January to May, foreign investment fell by 13.2 per cent year on year to about 358.2 billion yuan, government data showed.
The world's second-largest economy has also opened up outbound portfolio investment through government-designated channels, such as the Qualified Domestic Institutional Investor (QDII) program.
On Monday, China's forex regulator announced that it had recently allocated a total of US$3.08 billion in investment quotas to eligible QDIIs, to meet growing demand for overseas asset allocation.
The move aims to further support outbound investments in compliance with regulations, it said.
The QDII program plays an important role in China's financial market opening, allowing eligible domestic financial institutions to invest overseas by remitting both yuan and foreign currencies within approved limits.
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