Introduction: Reconstructing the Investment Logic in China Amidst Global Changes China's economy is undergoing a critical period of structural transformation. This transformation not only provides global capital with massive market opportunities but also poses entirely new requirements for traditional investment strategies. Against the backdrop of intensified global trade and technology competition, the decision-making logic for investment in China has shifted from simple factor-driven and market penetration-oriented approaches to a strategic reshaping centered on innovation-driven development, structural optimization, and systemic compliance.
China continues to demonstrate a strong macroeconomic foundation and growth resilience. First, China's massive market advantage remains significant. With a population base of over 1.4 billion and a continuously increasing urbanization level, domestic consumption potential is enormous, strongly supporting stable economic growth. Despite external challenges, consumption's contribution to economic growth will remain at 44.5% in 2024, continuing to play a leading role.
Second, from a medium- to long-term perspective, the growth prospects of the Chinese economy should not be underestimated. Based on forecasts of indicators such as labor productivity and population growth, and using economic convergence models, China's potential economic growth rate during the 15th Five-Year Plan period (2026-2030) is expected to remain at an average benchmark level of around 4.5%, and in an optimistic scenario, it may even maintain around 5.1%. This growth rate is relatively high among major global economies and is a key support for attracting long-term capital.
In recent years, China has made significant progress in continuously optimizing its opening-up environment and improving its foreign investment policy and legal system, such as implementing the "pre-establishment national treatment plus negative list" management model.4 However, the structure of actual foreign investment utilization is undergoing profound changes. Data shows that in 2024, the actual amount of foreign investment utilized nationwide was 826.25 billion yuan, a year-on-year decrease of 27.1%.5 This trend of "decreasing quantity but increasing quality" indicates that China's orientation in utilizing foreign investment has shifted from pursuing the quantity of capital to pursuing the quality of investment. The declining rate of return on traditional investment models that rely on cheap factors naturally leads to fluctuations in the total amount of foreign investment. However, China's stable political environment, long-term positive economic fundamentals, massive market, and advanced infrastructure make it a long-term preferred destination for multinational corporations.
Therefore, new investments must be deeply aligned with the central government's emphasis on "new-quality productivity" and industrial upgrading. For foreign investment to achieve sustained growth and policy dividends, it must focus on advanced technologies and high-quality management experience that can promote the "high-end, intelligent, and green" development of industries. Against this backdrop, this report will analyze in detail the three areas with the greatest long-term potential for foreign investment in China and extract five core elements to ensure investment success under the new regulatory environment.
Part One: Three Core Areas of Investment in China
Currently, the strategic focus of investment in China should revolve around the core goals of China's economic structural transformation and high-quality development. Based on this principle, three areas with the greatest investment potential have been identified.
Chapter 1: Area One: Advanced Manufacturing and High-Tech Industries with "New Quality" as the Core
"Leading the construction of a modern industrial system through technological innovation" is placed at the forefront of the nine key tasks for promoting high-quality development, and "developing new-quality productivity" is its core approach. New-quality productivity represents a new type of productivity driven by innovation and breaking away from traditional growth models. It constitutes the highest guiding principle for future foreign investment.
1.1 Strategic Guidance: The Core Investment Connotation of New-Quality Productivity
The central government has clearly required the integration of scientific and technological innovation resources to accelerate the formation of new-quality productivity, using scientific and technological innovation to lead the comprehensive revitalization of industries. The path to achieving this includes: targeting the commanding heights of future technological and industrial development, cultivating and developing strategic emerging industries and future industries; and simultaneously, actively using new technologies to transform and upgrade traditional industries, promoting the high-end, intelligent, and green development of industries. This means that when investing in manufacturing, foreign investment must be a true driver of growth, not simply a substitute for existing capacity.
1.2 Core Technology Tracks and Benchmarking Against Encouraged Projects
Foreign investment should focus on the six core technology fields clearly identified by the central government, including next-generation information technology, artificial intelligence (AI), quantum technology, biotechnology, new energy, and new materials.
1. Artificial Intelligence and Intelligent Manufacturing: Artificial intelligence and intelligent manufacturing are explicitly included in the "Catalogue of Industries Encouraging Foreign Investment." Investment opportunities extend beyond software and algorithms, encompassing the integration of hard technologies with industrial applications. Examples include participation in the construction of large-scale model innovation ecosystems (such as Shanghai's "Motion Speed Space") and investment in industrial internet, high-end CNC systems, and intelligent transformation of production processes.
2. New Energy Technologies and High-End Equipment: Under the "dual-carbon" target, new energy technology and equipment manufacturing is fertile ground for foreign investment. Encouraged projects cover the manufacturing of a range of high-tech green batteries, including nickel-metal hydride batteries, zinc-nickel batteries, sodium-ion batteries, lithium-ion batteries, and fuel cells. Furthermore, in terms of key components, the development and manufacturing of linear and planar motors and their drive systems, the manufacturing of AC frequency and voltage regulation traction devices, and compressors for refrigeration and air conditioning using DC speed regulation technology are all high-efficiency equipment encouraged for foreign investment.
3. High-Standard Technical Thresholds: It is worth noting that although the negative list for foreign investment access has achieved significant breakthroughs in the manufacturing sector (e.g., removing the requirement for Chinese majority ownership in publication printing and relaxing restrictions on traditional Chinese medicine production), the relaxation of market access does not equate to a reduction in competitive pressure. Foreign investment seeking to benefit from policy dividends must meet the extremely stringent technical standards outlined in the "Encouraged Market List." For example, the development and production of new functional glass is encouraged, but it must meet specific indicators such as infrared-transmitting lead-free chalcogenide glass and products, light transmittance ≥ 70%, and the purification and processing of high-purity ($≥ 99.998%) and ultra-pure ($≥ 99.999%) crystal raw materials. This clearly demonstrates that the country's goal is to attract investment that brings truly advanced technology and upgrades the value chain, rather than mature or outdated production capacity. Foreign investment's comparative advantage lies in its technological depth and global management experience. Establishing advanced R&D centers in China, focusing on breakthrough technologies, is crucial to ensuring that investment aligns with China's policy objectives of "new quality productivity."
Chapter 2: Area Two: Green Economy and Sustainable Infrastructure Driven by "Dual Carbon"
China has placed sustainable development and "dual carbon" (carbon peaking and carbon neutrality) goals at the core of its national strategy. Investment in China must incorporate environmental, social, and governance (ESG) factors, particularly in the infrastructure and energy sectors.
2.1 The Policy Foundation and Industrial Restructuring of the Green Economy
Policies call for support for cities to strive to peak carbon emissions during the 14th Five-Year Plan period and link new infrastructure construction with carbon reduction targets. Meanwhile, the "Catalogue of Industries Encouraging Foreign Investment" clarifies technologies, equipment, and products that significantly promote economic and social development, while the "Catalogue of Restricted and Eliminated Industries" mainly targets production capacities with outdated technologies that are detrimental to achieving carbon peaking and carbon neutrality goals. This structural shift has a dual significance for foreign investment: on the one hand, it eliminates the outdated production models that foreign investment previously relied on; on the other hand, it provides significant market substitution and upgrading opportunities for foreign investment with advanced green technologies.
2.2 Sustainable Infrastructure and New Urbanization
Infrastructure construction is an important component of urbanization, playing a fundamental supporting role in new urbanization. The investment structure is undergoing a fundamental transformation:
1. Optimization of Investment Structure: In the past, infrastructure investment was mainly concentrated in economic infrastructure such as electricity, transportation, and water conservancy. However, new urbanization places greater emphasis on the "people-centered" development characteristics, and the proportion of investment in social infrastructure such as healthcare, education, and social security is gradually increasing. Foreign investment can shift its focus from traditional hard infrastructure to social services and smart city solutions.
2. Green Building and New Materials: Foreign investment is encouraged in the production of energy-efficient chemical building materials (e.g., plastic-based steel and wood substitutes) and the intelligent manufacturing of new prefabricated building components. In the high-tech glass sector, products such as vacuum glass and thin-film battery-powered glass demonstrate a huge demand for high-efficiency, integrated building materials.
3. Clean Energy Applications: Investment areas include biomass drying and pyrolysis systems, biomass gasification units, biogas feedstock pretreatment and feeding, fermentation, and purification equipment, as well as solar air conditioning and heating systems. China places sustainable urban development at the core of its nationally determined contributions. This requires foreign institutions to provide systematic solutions, not just single products or technologies. Foreign investment experience in sustainable urban planning, green finance, and high-standard new material R&D is precisely what local governments urgently need to improve their debt management capabilities and establish sustainable financing systems.
Chapter 3: Area Three: Modern Services and Consumption Upgrading Guided by "Structure"
China possesses enormous consumption potential, with its consumer market continuing to expand and its structure constantly optimizing. Investment opportunities primarily lie in structural service upgrades that meet people's needs for a better life.
3.1 Accelerated Development of the Consumer Market and Service Industry
1. Strong Rise of Service Consumption: In 2024, per capita service consumption expenditure accounted for 46.1% of per capita consumption expenditure, exceeding the pre-pandemic level of 2019. The average annual growth rate of service consumption expenditure reached 9.6%, faster than during the 13th Five-Year Plan period. This reflects a shift in consumption structure towards high-quality, experiential services.
2. Investment Gap: Strong demand for service consumption has driven rapid price increases in related sectors. Among the eight major categories of consumer prices, the price increases for education, culture, and entertainment; other goods and services; and healthcare all exceeded the overall increase in consumer prices. This price signal clearly points to a relative shortage of high-quality service supply and a significant investment gap.
3.2 Investment Opportunities in Core Service Industries and the Experience Economy
1. High-end Professional Services: The "Catalogue of Industries Encouraging Foreign Investment" explicitly supports foreign investment in human resources and human capital services. This aligns with the increasing proportion of investment in social infrastructure (medical care, education, social security) in new urbanization. Foreign capital has advantages in high-end consulting, professional training, and modern financial services.
2. New Consumption Growth Points:
Various regions regard "first-launch economy" as an important tool for creating new consumption growth points and stimulating market vitality. The Ministry of Commerce will accelerate the issuance of policy documents to promote the first-launch economy. This requires multinational corporations to simultaneously launch new products and localize innovations in the Chinese market, utilizing China's efficient supply chain and digital platforms.
The number of visitors and tourism revenue for ice and snow leisure tourism are expected to increase significantly. Meanwhile, new growth points such as "silver tourism" are gradually taking shape. This provides a clear direction for foreign investment in high-end health and wellness facilities, professional medical services, and experiential tourism real estate.
3. Modern Agriculture and High-Quality Food Processing:
In the agricultural sector, investment focuses on increasing the added value and quality of agricultural products. This includes encouraging the cultivation and development of woody edible oil crops, seasonings, and industrial raw materials; and developing and producing green and organic vegetables, dried and fresh fruits, and tea cultivation techniques. Furthermore, the development and production of pet food and beverages are also encouraged, reflecting the continued demand for high-quality living materials due to changes in family structure and consumption upgrades. The rapid recovery of catering consumption (average annual growth of 9%) is attributed to catering enterprises' vigorous implementation of digitalization, quality improvement, health enhancement, and green transformation. This indicates that foreign investment, by introducing globally advanced operating models and digital service delivery experience to China, can gain an advantage in the rapidly growing high-value-added service market.
Part Two: Five Core Principles of Investing in China
Besides identifying the right investment areas, the success of foreign investment in China increasingly depends on a deep understanding and adaptation to China's complex and dynamic regulatory environment and strategic direction. This requires foreign investors to regard compliance, security, and localization as the five core principles for strategic success.
Chapter 4: Principle One: Precisely Anchoring Policy Dividends and "Encouraged" Opportunities
China continues to promote high-level opening-up, aiming to attract high-quality foreign investment. Foreign investment strategic planning must be elevated from "unrestricted" to "encouraged" to obtain scarce policy resources and dividends.
4.1 Synergistic Effect of the Negative List and the Encouraged Catalogue
The number of items in the Negative List for Foreign Investment Access (2024 Edition) has been reduced to 29, marking a continuous decrease in entry barriers. Especially in the manufacturing sector, the negative list has been essentially eliminated, removing the last two restrictions: Chinese majority ownership is no longer required for publication printing; and restrictions on traditional Chinese medicine production have been lifted.
However, market competition has not eased. Foreign investment must shift its strategic focus from merely meeting the requirements of the "permitted" category (outside the negative list) to actively aligning with the "Catalogue of Industries Encouraging Foreign Investment." Only by investing in encouraged projects can foreign companies enjoy policy benefits such as import tariff reductions, preferential land supply, and tax breaks. This shift from a "negative list" mindset to an "encouraged catalogue" mindset is crucial for successful investment strategies.
As analyzed earlier, the encouraged catalogue sets extremely high requirements for foreign-invested technology and product performance, covering specific processes and performance parameters. This necessitates that foreign investment bring advanced technologies and management models capable of driving China's industrial upgrading. Given the declining amount of actual utilized foreign investment, the government is more inclined to concentrate policy resources on investments that align with national strategic directions and bring new productive forces. Therefore, for foreign investors, investing in specific sectors within the "encouraged catalogue" is a strategic necessity to ensure investment returns and policy certainty.
Chapter 5: Key Point Two: Strengthening Data Governance and Cross-Border Compliance Capabilities
With the improvement of China's data security legal system, data compliance has become the lifeline for foreign investment operations in China. Foreign companies must establish a systematic and precise data governance and cross-border flow management mechanism.
5.1 Legal Framework and Risks of Extraterritorial Jurisdiction
China has established a strict data security and privacy protection system based on the Data Security Law (DSL) and the Personal Information Protection Law (PIPL). Foreign investors need to pay particular attention to the limited extraterritorial jurisdiction granted by Article 2 of the Data Security Law: Data processing activities conducted outside the territory of the People's Republic of China that harm national security, public interests, or the legitimate rights and interests of citizens or organizations will be subject to legal liability.
This means that foreign investors, even when processing data involving China, must maintain a high degree of compliance vigilance to ensure that their data processing activities are consistent with China's national and public interests, even when operating outside of China.
5.2 New Regulations and Pragmatic Management of Cross-Border Data Flows
The latest "Regulations on Promoting and Regulating Cross-Border Data Flows" has made pragmatic adjustments and tiered management to the cross-border data transfer obligations of foreign-invested enterprises, effectively balancing data security and business efficiency:
1. Clear Exemptions and Thresholds: The new regulations establish clear thresholds for the cross-border transfer of personal information. Foreign-invested enterprises transferring information on fewer than 100,000 people are exempt from the obligation to file standard contracts for the export of personal information. Furthermore, foreign-invested enterprises will only trigger a data export security assessment obligation if the cumulative number of personal information transferred across borders exceeds 1 million from January 1st of the current year.
2. "Essential" Exemption Mechanism: Regulators have clarified support for industries with "essential" cross-border data transfer needs. For example, cross-border payments necessary for contract fulfillment, cross-border e-commerce logistics, and legally implemented cross-border human resource management can be exempted from reporting obligations under exception clauses.
Foreign-invested enterprises should fully utilize these exemption and threshold mechanisms to reduce the compliance burden on daily operations. The key is to establish accurate data mapping and auditing mechanisms, focusing efforts on the compliance management of high-risk or sensitive data. Simultaneously, enterprises should formulate labor regulations or sign collective contracts in accordance with relevant laws and regulations to meet the "legally formulated" exemption conditions for cross-border human resource management. Data compliance management has become one of the key points affecting due diligence verification in investment and M&A projects and must be elevated to the strategic decision-making level.
Chapter 6: Key Point Three: Enhancing Intellectual Property and Technology Protection
Intellectual property protection is an important guarantee for China to continuously attract high-quality foreign investment and promote innovative development. Foreign investors must regard intellectual property protection as a core asset and a key strategy for long-term development in the Chinese market.
6.1 Continuous Improvement of the Intellectual Property Protection Environment
China has continuously strengthened international cooperation in intellectual property protection and improved the regular communication and exchange mechanism with foreign-invested enterprises. These efforts have significantly boosted the confidence of foreign-invested enterprises. In 2022, foreign-invested enterprises' satisfaction with China's intellectual property protection reached 79.11 points. This increase in satisfaction is the most direct manifestation of the Chinese government's sincerity and determination to open up to the outside world.
6.2 Strategic Utilization of Administrative and Judicial Protection Mechanisms
Foreign institutions should actively utilize China's increasingly Intellectual Property Protection System:
1. Rapid Rights Protection Channels: More than 4,600 foreign-invested and joint-venture enterprises have registered with national-level intellectual property protection centers and rapid rights protection centers. These centers aim to provide enterprises with fast and efficient intellectual property administrative rulings and rights protection services, significantly shortening the rights protection cycle.
2. Protection of High-Value Technologies: Given China's thirst for "new quality productivity" technologies, core and advanced technologies brought by foreign investment often receive stronger administrative and judicial protection. Foreign investors should closely integrate their investment in advanced technologies with local registration and protection mechanisms for intellectual property rights. Utilizing rapid rights protection channels not only safeguards their own interests but also demonstrates the "value" of their technology to Chinese regulatory agencies.
Chapter 7: Key Point Four: Adapting to the Normalization of Anti-Monopoly and Security Review
China has entered an era of strong regulation involving anti-monopoly and foreign investment security reviews. Investment decisions must incorporate the risks of these "non-economic policies" into the macroeconomic assessment framework.
7.1 The Strategic Significance of Macroeconomic Policy Consistency Assessment
The Central Economic Work Conference clearly stated the need to enhance the consistency of macroeconomic policy orientation, strengthen coordination among fiscal, monetary, industrial, regional, technological, and environmental policies, and, more importantly, incorporate non-economic policies into the macroeconomic policy consistency assessment.
This requirement has a profound strategic impact on foreign investment. It indicates that even if a project is financially attractive, it may face significant policy risks or a "fallacy of composition" if it is inconsistent with the country's non-economic policy objectives (such as data sovereignty, supply chain security, environmental protection, and social equity). Foreign investment institutions must establish a cross-departmental, systematic risk assessment model when making investment decisions to ensure that projects align with the country's overall strategy and social goals.
7.2 Risks and Responses to Foreign Investment Security Review
The "Opinions on Foreign Investment Security Review" (Security Review Measures) reviews foreign investments in sensitive areas involving national security, critical infrastructure, and important technologies. Foreign investors must recognize that security review has become a routine process for investment transactions involving sensitive industries.
In sensitive areas where investment may trigger security reviews (such as rare earths, radioactive minerals, nuclear power plant construction and operation, and domestic water transport, which typically require Chinese majority ownership or prohibit investment), foreign investors must plan the review process and timeline in advance and design transaction structures that meet security requirements (e.g., ensuring Chinese majority ownership).
7.3 Strong Anti-Monopoly Regulatory Environment
China continues to strengthen its anti-monopoly regulation. In foreign mergers and acquisitions, large enterprises must strictly comply with anti-monopoly compliance requirements. Especially in high-tech and data-intensive industries, anti-monopoly reviews will focus on market share, data concentration, and whether there is any behavior that uses technological advantages to exclude or restrict competition. During due diligence, all parties involved in investment and M&A need to pay attention to whether the prospective listed company's explanation regarding cross-border data compliance declarations truly complies with the exemption provisions of the "Regulations on Promoting and Regulating Cross-border Data Flows."
Chapter 8: Key Point Five: Deepening Localization Strategy and Value Chain Cooperation
Faced with increasingly fierce market competition and China's requirements for the resilience of industrial and supply chains, foreign investment can no longer operate as "outsiders" but must deepen its localization strategy to become a deep participant and contributor to China's modern industrial system.
8.1 Integrating into the Construction of a Modern Industrial System
The central government has clearly required "implementing high-quality development actions for key manufacturing industrial chains" and "enhancing the resilience and security level of industrial and supply chains." This strategic goal requires that foreign investment must serve the integrity and competitiveness of China's industrial chain.
Foreign investment's localization strategy should include:
Deep Integration into the Supply Chain: Through local procurement and establishing deep cooperative relationships with local suppliers, jointly solidifying the foundation of a modern industrial system.
In-China R&D: Leveraging China's outstanding advantages of a super-large market and talent dividend, strengthening the establishment of R&D centers in China, and conducting technological innovation tailored to the unique needs of the Chinese market.
Human Capital Investment: Encourage foreign investment in human resources and human capital services. The emphasis on high-depreciation-rate investments such as equipment and tool purchases implies that foreign investment should focus on advanced production equipment and technology to improve labor productivity.
8.2 Participation in the Institutional Drivers of TFP
China's long-term economic growth potential largely stems from the improved efficiency of factor allocation resulting from institutional reforms (accounting for approximately two-thirds of TFP growth). Deep localization and value chain cooperation by foreign investors are key to participating in this institutional driver. By introducing efficient management models, optimizing processes, and participating in China's marketization process, foreign investment can help improve factor utilization efficiency, thereby gaining stronger policy support and more sustainable investment returns.
Part Three: Conclusion and Outlook
The future of investment in China lies in a focus on structural transformation and high-quality development. China's long-term growth potential (around 4.5% benchmark) and its massive market advantage remain cornerstones that global capital cannot ignore. However, the success of foreign investment will no longer be determined by the size of the capital, but by its contribution to China's structural transformation.
Three core investment areas—advanced manufacturing centered on "new quality productivity," green infrastructure driven by "dual carbon" (carbon and carbon emissions), and modern service industries oriented towards structural upgrading—represent the optimal combination of policy dividends, market gaps, and long-term growth potential. These areas share common characteristics: high technology content, high added value, and direct service to the construction of China's modern industrial system.
Simultaneously, foreign investors must elevate compliance to a strategic level. Five core principles of investment constitute a systematic risk/opportunity framework: from accurately aligning with the "Encouraged Catalogue" to obtain policy incentives, to strictly managing the risks of cross-border data flows, and to incorporating non-economic policies (such as security reviews and environmental requirements) into investment assessments. Only by deeply understanding and adapting to this policy environment, and by thoroughly integrating their own operations with the goals of building China's modern industrial system, can companies achieve long-term, sustainable investment returns and fully enjoy the dividends brought by China's high-quality development. This is the fundamental strategy for global multinational corporations and investment institutions to achieve sustained success in the Chinese market.