By : Shatha Kalel
China, the world’s second‑largest economy, has undergone a radical transformation since the late 1970s, when Deng Xiaoping launched economic reforms in 1978, turning China’s economy from a closed, centrally planned system into a more open, market‑based one. These reforms were pivotal in attracting foreign investment, and within a few decades China became a global hub for manufacturing and trade. China’s accession to the World Trade Organization in 2001 marked a historic turning point, further opening its markets to global investment and enhancing its position as one of the main engines of global growth. Thanks to these changes, China succeeded in raising living standards, dramatically reducing poverty and building a vast industrial network that has made it an essential part of global supply chains. However, recent developments reveal a more complex picture of foreign direct investment in the country, particularly in light of current global economic and political challenges.
Recent developments in foreign direct investment: more projects but smaller inflows
According to China’s Ministry of Commerce, 36,133 foreign‑invested enterprises were established in China from January to July 2025, an increase of 14.1 percent year‑on‑year. However, actual inflows of foreign direct investment fell by 13.4 percent to 467.34 billion yuan (US$65.8 billion). This clear divergence suggests that global companies remain interested in entering the Chinese market but are committing lower levels of capital. This trend is linked to several factors: global economic uncertainty, inflationary pressures, restructuring of supply chains after the COVID‑19 pandemic, and rising geopolitical tensions—especially the trade war between China and the United States since 2018. This trade war, involving reciprocal tariffs, has undermined investment confidence and prompted many firms to rethink their long‑term strategies. Despite these challenges, some sectors have shown strong growth: manufacturing attracted 121.04 billion yuan, while services dominated with 336.25 billion yuan, reflecting a shift toward an innovation‑ and service‑based economy. High‑tech industries in particular have stood out, with e‑commerce services surging by 146.8 percent and aerospace equipment manufacturing up 42.2 percent, indicating a focus on future‑oriented sectors.
Global implications and future outlook
These changes carry profound implications for the global economy. On one hand, continued investment flows into technology sectors reinforce China’s status as a leading innovation power, making it a key player in shaping the future of global supply chains. Growth in high‑tech industries signals intensifying global competition in e‑commerce, aerospace and advanced manufacturing, prompting other economies to develop new strategies to keep pace. On the other hand, the overall decline in foreign direct investment reflects growing caution among investors, which could limit capital flows and slow international trade in the near term. If this trend continues, we may see a redrawing of the global investment map as countries seek to attract capital by improving their business environments and offering incentives. For China, the greatest challenge lies in balancing economic openness with national security, addressing concerns about transparency and the regulatory environment to ensure it remains on a growth trajectory and retains its position as one of the world’s largest economic players.
Economic Studies Unit / North America Office
Al-Rabetat Center for Research and Strategic Studies