China’s inward foreign investment has fallen sharply since the pandemic. Can policy incentives reverse this decline, or are deeper structural forces at work? ACI’s latest research examines one of China’s main tools for attracting foreign direct investment (FDI): the Encouraged Industry Catalogue for Foreign Investment, a government list of industries eligible for preferential investment treatment. The estimates suggest that industries included in the Encouraged Catalogue received more investment, although the event-study results indicate that the effect of new inclusion was short-lived.

As countries seek to reduce their reliance on any single supplier, inward FDI to the country has declined sharply. This decline has been accompanied by changes in both the source market and industry distribution of investment. Investment from key traditional investors, including the United States, Germany, and Japan, fell substantially in the post-pandemic period. Manufacturing, historically the largest recipient of FDI, also experienced major declines, including in high-value manufacturing industries.

In response, China expanded the 2022 Encouraged Catalogue to include industries such as electronic equipment, transport equipment, and pharmaceuticals. China’s broader foreign investment framework traditionally classifies activities as encouraged, restricted, prohibited, or permitted. The Encouraged Catalogue identifies industries eligible for investment incentives, while the Negative List identifies sectors in which foreign investment is restricted or prohibited. Industries included in the encouraged category may receive benefits such as tariff exemptions, preferential tax treatment, and priority access to land.

To evaluate the policy, the study analyses new foreign investment projects, commonly referred to as greenfield FDI. These projects are mapped to China’s Census Industry Classification, while changes across the 2020 and 2022 versions of the Encouraged Catalogue are tracked to compare investment trends before and after the policy changes. This allows the analysis to distinguish between industries that were already encouraged, industries added for the first time in 2022, and industries that were never included.

The results indicate that industries included in the Encouraged Catalogue received more investment, even after accounting for differences across source countries and industries. However, the evidence of an increase in the number of FDI projects was mixed. This suggests that the catalogue was more clearly associated with the value of investment received than with the number of new projects.

To assess whether this difference could be attributed more directly to the policy, the analysis also examined industries newly added to the catalogue. The results provide weaker evidence that these industries received more investment after the catalogue took effect than industries that were never included. The estimated post-inclusion effect was only marginally significant in one specification and statistically insignificant in another.

The event-study results show that newly encouraged and never-encouraged industries did not display significantly different investment trends before the policy change. Evidence of a post-policy effect was concentrated in 2023, the first year of implementation. The difference was only marginally significant in that year and was no longer statistically significant in 2024.

The overall pattern remains unchanged after accounting for provincial policies and foreign measures targeting particular Chinese industries. Encouraged industries continued to receive more FDI overall, while the estimated effect of being newly added to the catalogue remained positive but statistically insignificant.

The findings suggest that the catalogue may help steer foreign investment towards strategically important industries, although the evidence that inclusion itself caused a sustained increase is limited. Incentives alone are therefore unlikely to reverse China’s broader FDI decline while weak domestic demand, property-market pressures, and protectionist measures abroad continue to weigh on investment.

By Mukund, KISHORE

Researchers: LIU, Jingting, BANH, Thi Hang, LU, Weilin, GUO, Meiling