Shenzhen remains the second-most attractive destination for foreign investment in China for the second year in a row, according to a report released by the American Chamber of Commerce in South China (AmCham South China).

Guangzhou took the top spot for the seventh consecutive year. Shanghai and Beijing trailed behind Shenzhen.

The annual special report on the state of business in South China is regarded as an important window into China's business environment.

The report, based on a survey of 183 companies, said 40% of the companies expressed interest in setting up new offices or facilities in free trade zones in South China, an increase of 26% over 2022. Among these zones, Nansha of Guangzhou is the most popular (57%), followed by Qianhai and Shekou of Shenzhen (48%) and Hengqin of Zhuhai (26%).

The enterprises surveyed by the report come from the United States, China, the EU, and other countries and regions, of which wholly foreign-owned enterprises account for more than half. American companies represent nearly half of the businesses surveyed.

Of these companies, 76% plan to reinvest in China in 2024. For those who have plans for reinvestment in China in 2024, 45% state that their primary area of investment focuses on sales, marketing, and business development. Other key areas include research and development, automation, and productivity development, according to the report.

Potential growth of the Chinese market is the primary driver for increasing investments in China or shifting investments from other markets to China, followed by industrial cluster effects and preferential policies, said Harley Seyedin, president of AmCham South China.

"Our member companies will also pay attention to innovation and talent cultivation. This will strengthen corporate competitiveness and provide momentum for China’s transition from high-speed growth to high-quality development," he said.

The report also indicates that the proportion of companies satisfied with the overall business environment in South China has increased slightly to 75%. More than half of the companies surveyed (51%) believe that the business environment in South China has greatly improved or somewhat improved, an increase of 5% compared to 2022.

On par with findings in previous years, more than half of the companies surveyed consider the growing local market as the primary reason for establishing a presence in South China, followed by transportation, logistics advantages, and proximity to Hong Kong, Macao and Taiwan. Fierce local competition was cited as the biggest challenge faced by the companies, followed by rising operation costs and rising labor costs.

Some 68% of the companies claim that they will not decouple from the Chinese market due to trade tensions between China and the U.S. About 66% of American companies claim that they will remain committed to the Chinese market, representing the highest proportion of all businesses surveyed.