China’s New Push to Attract Foreign Investors Amid Global Trade Tensions

China has introduced new tax incentives to attract foreign investors and boost its economy amid global trade challenges. Foreign firms reinvesting profits in China can deduct up to 10% of the reinvested amount from taxes, with retroactive applications allowed from 2025. These measures come as geopolitical tensions and competition with the US intensify. Premier Li Qiang reaffirmed China’s commitment to global collaboration, while the country also expands outbound investment opportunities. The policies aim to balance openness with economic resilience.

China has ramped up its efforts to draw in foreign investors, unveiling fresh tax incentives as part of a broader strategy to rejuvenate its domestic economy and maintain a critical role in global supply chains. The move comes as Beijing navigates challenging trade discussions with key partners, including the European Union and the United States.

The newly announced measures aim to restore investor confidence and signal China’s commitment to openness, in stark contrast to the protectionist policies seen in some other major economies.

New Tax Breaks for Reinvesting Profits

On Monday, a joint statement from the Ministry of Commerce, the Ministry of Finance, and the State Taxation Administration introduced significant tax breaks for foreign firms reinvesting profits within China. Companies that reinvest their earnings into local operations can now deduct up to 10% of the reinvested amount from their onshore tax liabilities, with unused credits eligible for carryover until 2028.

Qualifying reinvestments include capital contributions to domestic businesses—such as establishing new entities or acquiring equity from unrelated parties—though investments in publicly traded shares are excluded. Notably, the policy also allows retroactive applications for reinvestments made since January 1, 2025.

Sun Lijian, a finance professor at Fudan University, highlighted the stark contrast between China’s approach and the United States' recent trade policies. “While the US is leveraging tariffs to pressure trading partners, China is offering tax relief to lure foreign investment,” he noted. Sun also pointed to complementary measures, such as visa-free travel programs, designed to integrate foreign businesses more deeply into China’s economic framework.

Addressing Geopolitical and Economic Challenges

Foreign firms have historically reinvested earnings to expand their footprint in China, but heightened geopolitical tensions and economic uncertainties have dampened investor sentiment. In 2024, China saw a record net capital outflow of $168 billion, according to Bloomberg—underscoring the urgency of policies that create a more favorable business environment.

These new tax incentives come at a pivotal time, as China engages in delicate trade negotiations with the EU and the US—its second- and third-largest export markets, respectively. Despite these challenges, foreign investment remains a cornerstone of China’s economic strategy, offering employment opportunities, technological advancements, and management expertise critical to fostering trade relationships.

Speaking at the World Economic Forum’s Annual Meeting of the New Champions in Tianjin last week, Premier Li Qiang reaffirmed China’s commitment to global economic integration. “We will open the door wider to the world,” he pledged, emphasizing plans to deepen industrial collaboration and share the benefits of China’s growth with global partners.

Competition for Investment in a Changing Landscape

China’s efforts to attract foreign investment face stiff competition, particularly from the United States, which has implemented measures such as higher tariffs on Chinese goods and tax incentives to bring American manufacturers back home. These dynamics have contributed to a 13.2% drop in foreign investment into China during the first five months of 2025, totaling approximately 358.2 billion yuan, according to official data.

In addition to promoting inbound investment, China is also expanding opportunities for outbound portfolio diversification. On Monday, the State Administration of Foreign Exchange (SAFE) allocated $3.08 billion in new investment quotas under the Qualified Domestic Institutional Investor (QDII) program. This initiative allows approved domestic institutions to invest in overseas assets within regulatory limits, reflecting growing demand for international asset diversification.

A Balancing Act in a Shifting Global Economy

China’s dual focus on encouraging foreign investment and facilitating outbound capital flows underscores its commitment to maintaining a balanced and open financial system. While global economic conditions remain uncertain, Beijing’s latest measures highlight its determination to adapt and strengthen its position in an increasingly competitive global landscape.

As policymakers continue to refine strategies to attract foreign investors, China’s approach offers a marked contrast to the more protectionist policies seen elsewhere. Whether these measures will be sufficient to counteract rising geopolitical tensions and economic headwinds remains to be seen.

This article is based on information sourced from the South China Morning Post (SCMP).