Foreign Capital Flees China Amid Economic Uncertainty and Tightening Regulations

Foreign investment in China has seen a sustained decline since 2023, driven by an uncertain economic outlook and increasingly stringent policies for foreign capital. The Ministry of Commerce reported a 26.1% year-on-year decrease in foreign direct investment (FDI) in April, reaching its lowest point since May 2025. For the first four months of 2026, FDI fell by 10.3% compared to the same period last year.

Manufacturing and service sectors both experienced declines in FDI during the first four months of 2026, with decreases of 6.2% and 11.7% respectively. This trend follows a broader pattern of capital outflow, as FDI in 2025 dropped 9.5% from the previous year, marking the lowest level since 2014. In 2024, FDI saw a significant 27.1% decrease.

Adding to investor concerns, China's State Council issued "Supply Chain and Supply Chain Security Regulations" in April. This 18-point regulation, described by some as a "commercial national security law," aims to prevent supply chain risks. It establishes an investigation system and countermeasures against foreign entities deemed to harm China's supply chains.

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The "Supply Chain and Supply Chain Security Regulations" are vague and increase the risks of doing business in or with China.

The China-EU Chamber of Commerce criticized the regulations for their ambiguity, stating they increase the risks of doing business in or with China. They expressed concern that legitimate business decisions could be misinterpreted as threats to the supply chain, potentially leading to penalties for employees, including exit bans.

Scholars believe these regulations place foreign companies in a difficult position, forcing them to choose between complying with U.S. sanctions and Chinese law. The lack of transparency surrounding these rules heightens personal safety risks and is expected to accelerate the exodus of foreign capital, potentially trapping China's economy in a negative cycle.

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The high level of opacity of related regulations not only increases personal safety risks but may also accelerate the withdrawal of foreign capital and the decline of FDI, instead causing China's economy to fall into a vicious cycle that is difficult to escape.