Policymakers at home and abroad are anxious about offshoring.
For decades China has put foreign capital to work. Officials encouraged Western firms to trade technology for access to its vast market, helping to build up Chinese competitors that were often better and always cheaper. They began shipping goods westwards. The resulting “China shock” is often blamed for causing economic dislocation and despair in America’s industrial heartlands.
Now, however, it is China’s turn to worry about offshoring. Its manufacturers are taking flight.
In the year to June Chinese firms invested a record $177bn in non-financial assets abroad. More than four-fifths is likely to have been ploughed into “greenfield” projects, in which assets are built rather than bought, mostly in emerging markets. The total flow is roughly equivalent to 1% of China’s GDP, about as much as Japanese conglomerates spent offshoring their low-value manufacturing each year in the mid-1980s. That earlier wave of outbound foreign direct investment (FDI) remade global manufacturing, helping countries in South-East Asia climb up the value chain.
Chinese FDI, by contrast, is causing anxiety both abroad and at home. China’s firms have so far resisted hiring local workers, buying from local suppliers or sharing technology, leading recipient countries in Asia and Europe to press for more tech transfer. China’s policymakers, meanwhile, are weighing the advantages of going overseas against the fear of “hollowing out” domestic industry.
The investment spree is a consequence of American and Chinese policy. Tariffs introduced by Donald Trump during his first term as president encouraged Chinese firms to move production in order to change their goods’ country of origin and thereby skirt duties. At the same time, operating in China became harder. Labour costs soared, shrinking margins on low-value goods. Weak consumer spending and a huge state-sponsored expansion in loans to manufacturers dragged producers into price wars and pushed them to look for new markets.
As a result, Chinese firms are pouring cash into factories in emerging markets, including those making higher-value-added goods such as electric vehicles (EVs) and computer chips. That is a shift from a surge of Chinese investment in 2014-16, when the government encouraged companies to “go out”. Investors bought trophy assets in the West that were safe places to store cash, like the Waldorf Astoria hotel, notes Thilo Hanemann of Rhodium Group, a research provider. In 2016 rich countries received 80% of China’s outbound investment. The share was just 30% in 2023.
According to the IMF, the beneficiaries this time have been countries that act as “connectors”, through which China can retain access to Western markets. Many of these are in South-East Asia. Vietnam receives investments related to low-value-added goods production, and Indonesia gets investment for critical minerals. Malaysia and Thailand are home to EV projects.
Considering that all these countries want to make more advanced goods, such flows should be welcome. Capital invested in factories or data centres is less flighty than the money that trades emerging-market debt. Moreover, shovels in the ground have larger multiplier effects on the local economy than acquisitions of existing businesses. And foreign investment brings valuable spill overs, as technology and skills are shared with local workers and suppliers.
The problem is that China’s splurge brings few of these benefits. For a start, Chinese firms prefer to import their own workers. Chinese recruitment platforms posted more than 418,000 new vacancies for positions involving overseas travel between January and November. Even in Germany, where skilled labour should be readily available, one-fifth of the workforce at CATL’s battery-making plant are Chinese nationals. Local workers “rarely make up more than half” of the workforce on Chinese-owned projects, says Ong Kian Ming, Malaysia’s former deputy minister of investment. A rule that projects should have an 80:20 split of local to foreign workers could never be enforced, a Malaysian official sheepishly admits.
Moreover, China’s officials are keen to keep technology at home. The commerce ministry has told EV firms that their core technology is not to leave the country, lest it give others a competitive edge.
In December the government began requiring firms to obtain licences to export sensitive technologies. Regulators have sought to limit overseas operations to “screw-driver” plants, in which workers assemble parts made in China rather than buying them locally. The reliance on Chinese imports is reflected in gaping trade imbalances. The ten member countries of the Association of Southeast Asian Nations (ASEAN) ran a deficit of $144bn with China in the first ten months of 2024, 38% higher than in the same period in 2023.
To make matters worse, Chinese firms are crushing their local rivals. With a factory comes market access. Chinese carmakers doubled their market share in Thailand, home to a new BYD plant, to 11% in 2023, squeezing not only competitors but also smaller, local firms that make parts. Suzuki, a Japanese carmaker, was among the 2,000 producers to shut factories in Thailand in the year to June 2024, a 40% increase in closures from 2022-23. A leading Thai auto-parts maker has warned that upstream suppliers may be wiped out.
This is sowing dissatisfaction among countries that receive investment. Chinese investors, says an official in Kuala Lumpur, “cannot just use our land without hiring our people or buying our products”. Malaysia will begin taxing firms in 2025 based on how many foreigners they employ. ASEAN is also wrapping up a new free-trade agreement with China that is said to include commitments by China to share technology. Some are hoping that Mr Trump takes a harder line on the rebadging of Chinese-made products when he returns to the White House.
Faced with these pressures, Chinese investors would perhaps in time localise their operations. A representative at CATL’s plant in Thuringia, Germany, recently boasted that its canteen now serves local food, alongside Chinese dishes. ASEAN-country officials are optimistic that entrants will establish new supply chains. But Chinese companies must also contend with politics at home. The more localised overseas production becomes, the more Chinese policymakers see it as a threat to the domestic economy.
Worries about the consequences of offshoring are building in China. “In the short term, the impact of industrial relocation on China’s overall exports is limited,” wrote Luo Zhiheng, a leading private economist, in September, but longer-term risks “of industries being hollowed out, macroeconomic fluctuation, and higher unemployment”, need attention.
Although some economists think relocating low-value production will free China to focus on higher-value manufacturing, local governments want to hold on even to such low-value exports. An official in Jinjiang, the “zipper capital” of China, told state media that migrating firms will fail to replicate the city’s supply chains. Officials in Jiaxing, a steel town in the east, have quizzed firms on their offshoring intentions, cautioning against the risks to economic stability from “disorderly outbound investments”.
Because state planners push firms to buy from suppliers in the same city or province, some scholars are concerned that outward investment by local champions will hurt nearby suppliers, resulting in a concentrated shock to local employment. Economists at a state think-tank have urged officials to “keep the main part of leading enterprises in China as much as possible” and to “prevent the clustered outward transfer of capital”.
Policymakers find themselves in more of a bind than in 2016, when they last fretted about hollowing out. Then they were quick to throttle outbound capital flows, says David Lubin of Chatham House, a think-tank. The government introduced foreign-exchange caps and a traffic-light system to limit and prohibit some overseas investment, reducing flows by 35% within a year. This time, however, China benefits from skirting American tariffs, notes Mr Lubin.
Nonetheless, the Communist Party is starting to acknowledge that strains from “changes in [China’s] external environment” have worsened. At an annual economic-policy meeting in December party leaders identified employment, and its effects on social stability, as a priority for 2025.
Xi Jinping, China’s leader, has repeatedly called for supply chains to be “self-determined and self-controlled” (meaning by China). He would prefer low-value industry to move to poorer parts of China’s interior, to preserve the country’s grip on supply chains. The National Development and Reform Commission, the central economic planner, praised the southern and western regions of Yunnan and Chongqing in May for attracting firms from richer, eastern parts.
“Against the backdrop of the accelerated reconstruction of the global industrial chain”, wrote the planning department, China should leverage the “economic depth of a big country and retain the roots of the manufacturing industry.” Politics caused firms to take flight. It could yet summon them home. ■
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