Chinese Direct Investment Surged to $6.8 Billion Last Year
147% Increase Makes China Top Investor, Surpassing Japan and the U.S.
Boosts Regional Economies and Stabilizes Supply Chains
"Countermeasures Needed for Indirect Exports and Technology Leakage"
It has been observed that China is increasing its direct investment in South Korea, particularly in advanced manufacturing sectors such as batteries, in order to circumvent U.S. regulations targeting China and to enhance its utilization of South Korean industrial infrastructure and technology. While such investments may benefit the development of local regions and industries in South Korea, there are also concerns about potential technology leakage, highlighting the need for sector-specific management strategies, according to experts.
According to the Korea Institute for International Economic Policy's report, "Recent Increase in Chinese Investment in South Korea: Background and Implications," published on August 8, the amount of Chinese direct investment in South Korea (including Hong Kong) reported last year surged by 147.4% year-on-year to a record high of $6.794 billion.
This figure is larger than last year's U.S. investment in South Korea, which was $5.24 billion, making China the top investor in South Korea for the first time in seven years, surpassing the United States. The share of Chinese investment in South Korea's total foreign direct investment (FDI) soared to 19.6% last year, outpacing Japan (17.7%) and the United States (15.2%).
In contrast, the actual amount of Chinese direct investment executed in South Korea last year was $1.23 billion, ranking sixth (7.0%) among all FDI sources. In terms of executed investment, Malta (14.3%), Singapore (12.5%), Japan (10.2%), and the United States (9.9%) had higher shares.
Of the executed investment, 77.7% ($964.48 million) flowed into the manufacturing sector. Within the total executed amount, the manufacturing industries of electrical and electronics (33.3%), pharmaceuticals (33.3%), and machinery and medical precision equipment (3.6%) stood out. The share of the service sector, which neared 82% in the early 2010s, dropped to just 21.6% last year.
The report noted, "Last year, actual investment was mainly concentrated in industries with high strategic and technological significance, such as primary batteries, storage batteries, and LCD manufacturing, with the exception of pharmaceutical manufacturing."
It also explained, "A review of recent individual investment projects shows that large-scale investments by Chinese battery companies have been made, particularly in Saemangeum. In addition, electric vehicle companies such as BYD and Zeekr, as well as distribution and logistics companies like Alibaba and Temu, are expanding their entry into the South Korean market."
Various factors have contributed to the increase in Chinese investment in South Korea. The report stated, "After the United States designated China as a Foreign Entity of Concern (FEOC), China has been expanding its presence in South Korea to circumvent U.S. regulations targeting China."
It further pointed out, "Amid escalating U.S.-China tensions, the increase in Chinese investment in South Korea reflects objectives such as technology utilization, securing production and market entry, and a strategic need to strengthen economic ties with South Korea."
In fact, China has been increasing its investment in South Korea, particularly in advanced manufacturing, over the past several years to utilize South Korea's advanced industrial infrastructure and technology. A major example is that 18.5% ($1.259 billion) of China's reported direct investment in South Korea last year was directed toward the battery sector.
However, the report assessed that regulatory uncertainties stemming from the U.S. intensifying its checks on China, as well as a global economic slowdown, have widened the gap between reported and executed investment amounts. For instance, SK On, EcoPro, and China's GEM announced plans in 2023 to build a precursor plant in Saemangeum but later withdrew those plans.
The report suggested that Chinese investment in South Korea could have positive effects, such as revitalizing regional economies and stabilizing supply chains. It particularly noted that, since South Korea relies heavily on China for imports of graphite and other key materials for strategic industries like batteries and semiconductors, there are advantages to cooperation.
However, risks such as the potential decline in competitiveness of domestic companies producing the same items, concerns over technology leakage, and the possibility of high U.S. tariffs were cited as factors that require management. The report advised, "The government needs to establish sector-specific strategies for attracting and managing investment."
It added, "There is a need for continuous monitoring of investments aimed at indirect exports in sectors sensitive to external regulation, such as batteries and semiconductors, as well as for seeking measures to prevent technology leakage and ensure sustainable cooperation."
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