US and European companies are redirecting their investments away from China to other developing markets, according to a report by Rhodium Group. The primary recipients of this redirected foreign capital are India, followed by Mexico, Vietnam, and Malaysia.

Despite China’s increasing share of global growth, concerns about its business environment, economic recovery, and politics are causing foreign investors to turn away from the world’s second-largest economy.

The report highlights a significant increase in announced US and European greenfield investments in India, rising by $65 billion or 400% between 2021 and 2022. In contrast, investments in China dropped to less than $20 billion in 2022, down from a peak of $120 billion in 2018.

The research organization noted that ‘diversification is well underway,’ but it also recognized that achieving the objectives of their ‘de-risking’ policies will take years due to China’s central role in global supply chains.

China initially attracted foreign firms in the late 1980s with its low production costs and the promise of a burgeoning middle class. 

However, with consumers tightening their spending and production costs on the rise, the Chinese market is losing its appeal.

This shift in investment comes as Chinese local authorities grapple with the aftermath of an economically challenging pandemic and a property crisis that has strained their finances.

Western companies are increasing their greenfield investments in these markets to provide alternative sources for assembled goods and geopolitically sensitive commodities, such as semiconductors, as well as to reduce their reliance on China in their supply chains.

The report’s authors cautioned that while diversification is underway, it’s unlikely to result in a rapid reduction in exposure to China. 

This is because the markets where foreign firms are investing are heavily interconnected with trade and investment from China itself.

As a result, the report predicts that China’s overall share of global exports, manufacturing, and supply chains may continue to rise, even as diversification away from China accelerates.