India must tread cautiously on further easing of Chinese FDI norms

The experience of Asean economies and the European Union shows Chinese investments come with serious implications for host countries

Earlier this year, in a partial relaxation of Press Note 3, India eased the foreign direct investment (FDI) rules to allow foreign investors with up to a 10 per cent shareholding in land-border countries, including China-linked capital, to invest in India under the automatic route, subject to sectoral caps and related conditions. 

The recipient company, though, is required to report the relevant details to the concerned ministry. Additionally, a 60-day window for processing investment proposals from neighbouring countries has been provided in select manufacturing sectors, such as capital goods, electronic capital goods and components, polysilicon and ingot-wafer, with the stipulation that majority shareholding remains with an Indian citizen or Indian-owned entity. The relaxation does not apply to sensitive sectors such as defence, space and atomic energy. 

The amendment brings in an element of regulatory ease for multinational corporations (MNCs) with minor Chinese holding, or for joint ventures in which Chinese entities hold non-controlling stakes. In this context, some key trends in Chinese FDI over the past decade in both developing and developed economies are worth highlighting. 

The initial spurt in Chinese FDI over the last decade was primarily owing to the higher tariffs imposed by the United States (US) during the first Trump presidency. It gathered momentum with the persistently weak domestic consumption spending and emerging excess industrial capacity. More recently, it was spurred by the imposition of reciprocal tariffs and stricter scrutiny of transshipment of exports under Trump 2.0. In the early years, Chinese FDI largely followed the global value chain (GVC) diversification strategy of nearshoring in Asean, mainly in Vietnam, Thailand, and Malaysia. As these Asean economies, which had been evolving into alternative export hubs for China, began to face stricter rules of origin in their trade with the US, Chinese FDI diversified geographically, both within and beyond Asean. 

In Asean, Indonesia, Cambodia and Laos have been the addition to the Chinese FDI portfolio. Furthermore, large corporations from China are investing in diverse strategic and green energy sectors. These include resource mining, semiconductors, electric vehicles (EVs), battery production for EVs and renewables. 

Domestic manufacturing in Asean has benefitted in the past from Chinese FDI and China-centric value chains, which engendered Asean specialisation in intermediate parts and components. However, the recent pattern of Chinese FDI threatens this very same local supplier network in Asean economies. 

In Vietnam and Indonesia, for example, industries that have Chinese FDI are importing more machinery, upstream inputs and capital goods from China to undertake production rather than using local Asean suppliers. Consequently, Chinese companies are not just in control of the final stages of value chains but also the supply of intermediates, thereby threatening to displace local small- and medium-scale producers/suppliers. 

Therefore, Asean has begun to formulate policy measures to guard against the FDI-related import surge from China and the associated possibility of “hollowing out of domestic manufacturing” and consequent job losses.  While restricting majority shareholding to domestic producers in joint ventures with Chinese companies is being actively discussed, so far, higher tariffs and anti-dumping duties have been the primary safeguard measures adopted by Asean economies. 

The European Union (EU), another major investment destination for Chinese companies, has adopted even more stringent measures against FDI from China. Chinese FDI to the EU is increasing even as exports continue to rise despite China-specific higher tariffs and stricter import regulations being imposed by the EU. The EU’s steel regulation, for example, has been formulated to address the negative trade-related effects of global overcapacity in the steel market.  Specifically, the new “melt and pour” traceability requirement for steel imports helps lower steel import quotas, while also eliminating the scope for the transshipment of Chinese steel through third countries. 

Moreover, Chinese investors wanting to use Chinese workers in their European plants, as in the case of battery-producer CATL’s plan to build its EV factory in Spain,  has also alerted EU policymakers to the spillover costs of FDI from China. In addition, limited knowledge sharing with domestic European companies and the takeover of underutilised factory spaces of EU companies by Chinese auto companies like BYD and Geely have led to fears of job losses in the EU. 

It is worth pointing out here that the first phase of Chinese industrial expansion in the early 2000s did not lead to job losses in Europe to the same extent as in the US. The EU intra-regional value chain integration was in an accelerated mode at that time, particularly in the automobile industry, owing to the integration of the Central and Eastern European economies into the EU. Now, it is the very same automobile industry that stands most threatened by Chinese FDI in EVs. The expansion in Chinese FDI is, therefore, being viewed as a serious challenge to preserving manufacturing capacity and jobs in the EU. 

Stricter policy instruments against Chinese industrial overcapacity, subsidies and currency distortions are being widely debated and formulated across the EU. Strategic sectoral decoupling is being actively incorporated in both trade and industrial policy. In June this year, the EU, as part of its Economic Security Strategy, adopted a new harmonised foreign investment screening regulation targeting, among others, specific hi-tech sectors and critical infrastructure sectors.  In early 2026, the EU passed the Industrial Accelerator Act that proposes to strengthen intra-regional value chains by increasing Europe-sourced content in manufacturing. 

Significantly, effective July 1, China has also revamped its overseas investment regulatory regime. Essentially, restrictions on and scrutiny of technology and know-how sharing by Chinese companies investing abroad have been increased and extended across the entire lifecycle of their overseas investments. The scope is broad and includes restrictions on sending engineers abroad, cross-border training programmes, remote technical guidance, overseas research and development, among others.

The sectors covered include, inter alia, high-tech fields like lithium battery manufacturing for EVs, biotechnology, AI algorithms, rare earth processing and aerospace guidance systems. Thus, the implications of Chinese FDI for the host economy in terms of contribution to technological advancement as well as security considerations are quite serious. 

Therefore, given the dynamic geopolitical context and longstanding security concerns, India has done well to approach relaxation of Press Note 3 FDI rules with caution. This watchful strategy should be retained for any future liberalsation of FDI from China.

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The writer is professor, School of International Studies, JNU, and the author of India’s Trade Policy in the 21st Century, Routledge: London, 2022.

(The views are personal)