Argument about New Foreign Investment Policy

Is the new foreign investment policy issued by the Chinese government good or bad for the foreign investors? No confirmed sayings are available yet.

The recently-issued foreign investment policy has been under heated discussion since it came out.

On April 13, the State Council published the “Several Opinions of the State Council on Further Doing a Good Job in the Utilization of Foreign Investment” (hereafter Opinions). Five major parts are included in this document: a), to optimize the foreign investment utilization structure, particular to encourage the foreign investors to invest in high-end manufacturing, modern service, new energy and environmental protection, and simultaneously, to exert strict restrictions over the projects with “high pollution, high energy consumption and resource dependence”; b), to guide the foreign investments into the western and middle part of China; c), to diversify the ways of utilizing the foreign capital; d), to deepen the reform to the foreign investment management system, including the decentralization of the approval rights of foreign investments; e), to create good investment environment.

Different Readings of the New Policies

The Opinions contains the Chinese government’s reflection over its foreign investment policies as well as the significant changes to them. Different market entities made different readings to the new policy and forecasts of the future situation based on their own viewpoints.

On the one side, the government departments, official media and securities markets call the Opinions the “new foreign investment policy” and advocate the positive effect of this document upon China’s foreign investment recruitment. For example, an insider from the National Development and Reform Commission, when talking about the background and motivation of the issuance of the Opinions, said that it is necessary for China to change its economic development pattern and economic structure more rapidly due to the significant changes brought by the international financial crisis. “This requires us to further deepen the reform, enlarge the opening and improve the quality and level of using foreign capital.” This means that new policy is to continue the opening and the object of the adjustment is to consummate the mechanism of market economy and to create a fair and normative market environment for each enterprise. All these serve for attracting foreign investments.

When the domestic security dealers and analysts talked about the Opinions, optimistic opinions were also widely heard. They stressed that the clause of “encouraging the foreign investors to participate in the reorganizations and restructurings of the state-owned enterprises (SOEs) through buying shares or acquisitions” will stir up a new wave of mergers and acquisitions by foreign capital and bring about a large amount of investment opportunities. Meanwhile, the qualified foreign companies are given support in public offering, corporate bond issuance and middle-term invoice in China, which will not only help to solve the financing problem haunting foreign capital but also inject new energy into the Chinese security market.

The labor-intensive foreign companies are encouraged to move into the western and middle part of China, which can optimize the foreign capital structure in the coastal areas and relieve these places from the land shortage. Meanwhile, it can help boost the economic development in the western and middle part of China.

In comparison, some foreign companies think that the Opinions puts an end to the “super national treatment” for the foreign investments. Before the issuance of the Opinions, the foreign enterprises, which are sensitive towards the changes in policies, have already realized the possible changes. The Sino-US Chamber of Commerce made a survey in March, concluding that 38% of the American enterprises having invested in China felt that they became less and less popular in China. Joerg Wuttke, president of the European Union Chamber of Commerce in China wrote in the Financial Times that China is bringing the foreign investors to their knees.

There were worries and concerns from the foreign enterprises about the weakening of their “super national treatment” since the tax rate for the Chinese and foreign companies are uniformed in 2008. But frankly speaking, the changes to the foreign investment policy, including unifying the tax rate, didn’t come from sudden impulse or the intention to break the promise made when joining in the WTO. In truth, the Chinese government mentioned in 1995 that “China should use the foreign investment actively, reasonably and effectively and gradually spread the ‘national treatment’ among the enterprises”. Therefore, the Opinions tallies with the schedule made 15 years ago. No intentional discrimination towards the foreign investment exists.

Outdated “Super National Treatment”

At the beginning of the reform and opening up, China was short of capital and foreign exchanges, as well as technologies and management experiences. Therefore, China was in great need for the foreign capital. Then some local governments took a lot of measures to attract foreign investments in order realize faster economic growth rate. Different kinds of “super national treatments” also created loose economic environment for the foreign capital. In addition, when negotiating about joining in the WTO, China promised not to implement the discriminative “secondary national treatment” for the foreign investment and simultaneously acquiesced in the “super national treatment” for foreign capital in China. However, the latter was not the solid requirement of the WTO; instead, such a policy varied to the national economic condition.

Influenced by the international financial crisis, China’s FDI saw continuous fall from the fourth quarter of 2008. Many multinationals’ headquarters began to be short of money and needed to recall the capital put into China to offset their balance sheets, which was the main factor for straight negative increase of China’s FDI. However, compared with the 40% decrease of the global FDI, the actually utilized foreign capital in China in 2009 was maintained nearly at the same level of 2008, with a tiny decrease of 2.56%. Once the international financial crisis faded away, the developed countries’ banking credit and financial market will be recovered and the multinationals will increase their investments in China, bringing back the FDI. According to the latest statistical data from the Ministry of Commerce, the amount of actually utilized foreign capital in China from January to April was 30.789 billion US dollars with an 11.28% like-for-like increase.

During the 30 years of reform and opening up, the foreign capital invested in labor-intensive manufacturing industry contributed a lot to China’s economic growth, urbanization and employment. But undoubtedly, the foreign investors also earned a lot from the rising China. The cheap labor force which seems unlikely to be run out became the major appealing force for the foreign investors. According to a report from the Ministry of Labor and Social Security in 2004, the monthly salaries of migrant workers in the Pearl River Delta only increased by 68 yuan (USD 9.96). If the increase of consumer price was deducted, their monthly salaries actually decreased.

After several years’ fast increase, China’s economy has to face the tightening external and internal restrictions. For example, according to the forecast, the first round of demographic dividend period in China will begin to wane from 2012 to 2020. What’s more is the stress from the RMB exchange rate from Europe and the USA, forcing China to reconsider its economic growth pattern which highly depended on the export. This explains the necessity of making changes to the foreign investment policies.

The “super national treatment” for the foreign investment has obvious defects from both the legislation spirit and basic principles of economics. Firstly, the TRIMs Agreement and the other trade codes have no definite regulations about not giving the members the “super national treatment”, but the difference in the treatments for the foreign companies and domestic companies doesn’t tally with the free trade spirit the WTO advocates. Secondly, the indirect subsidies for the foreign enterprises have become an important inducer for the endless trade conflicts between China and the other countries. Thirdly, the measure brings about damages to the efficiency and fairness in the domestic market – the preference of the local governments gives the foreign enterprises favorable conditions which can generally squeeze the domestic enterprises out of the market. Lastly, the “super national treatment” has spoiled some foreign enterprises which lack the enthusiasm to work with the promotion of China’s economic structure.

Certainly, the foreign companies’ complaints should be seen from two different viewpoints. For a long time, China holds two contradictory attitudes towards the foreign capital: on the one hand, the foreign investors enjoy the “super national treatment” in land expropriation, tax reduction, exports tax rebate, foreign exchange settlement and registered capital; on the other hand, “secondary national treatment” was given to the foreign companies in some fields: such as localization, approval system and industry access. Therefore, the Chinese, as advised, should not easily feel offended by the foreign investors’ complaints. Further communication and exchange are needed to detect the problem and solutions should be found as soon as possible. In addition, the cancellation of the “super national treatment” for the foreign investors should take place gradually and by stages. The unification of the tax rate for foreign and domestic enterprises set a good example – to increase the tax rate for foreigners from 15% to 25% in five years, giving the foreign investors enough time to get used to the changes so they can avoid big impact.

Foreign Investors to Keep Pace with Times

Different viewpoints result in the different understandings of the foreign companies and Chinese media and experts for the Opinions. The foreign companies have to see the necessity of the Opinions with a longer viewpoint and connect their own development closely with China’s economic transformation in the next 30 years. This not only reflects their positive attitudes but also endows them with prospective strategic vision.

When China defined the year of 2010 as the “year of economic structure adjustment” for China, people have to realize that the structure adjustment doesn’t simply mean the upgrade of manufacturing or energy saving and emission reduction. It includes at least four profounder connotations: a), to level up the driving force of consumption for the GDP which could lessen the dependence upon the government investment and export; b), to make the local governments abstain from their addiction to the property industry and annihilate the possibility that the China’s economy were kidnapped by the property developers; c), to reorganize the income distribution system which shifts the focus from “efficiency” to fairness; d), to balance the economic development of different regions.

The economic structure adjustment eliminates the old pattern and generates the new one as well as new opportunities. The changes to the policies of foreign investment are an important link. The foreign enterprises can benefit from the more balanced economic development in the next 30 years’ development of China.

During the process of changing, if the companies can not get used to it and even repel against the changes by taking back their investments, what they could get are unnecessary trouble and loss. To avoid this requires:

Firstly, the most important task for the foreign investors is to know the new policy of China on foreign investment to get rid of the misunderstanding. They must make clear that the Opinions lays emphasis on encouraging the foreigners to invest in high-end manufacturing, new technology, modern service and environment-friendly industry while restricting the investment into the projects which can cause serious environmental problems and consume a large amount of natural resources. In other words, China welcomes any foreign investment suitable for China’s economic development pattern. In addition, the foreign companies that invest in West China can still enjoy the favorable conditions in tax, which can lure more foreign investors to the middle and western part of China.

Therefore, China’s attitudes towards the foreign investment just go through some tiny changes. The other countries, including China’s neighbors Korea and Japan, all went through the same process during their development. Their aims were to maximally maintain the market efficiency and fairness.

Secondly, whether the Opinions can be implemented smoothly depends on the foreign enterprises as well as the local governments. In the past, the amount of “actually utilized foreign capital” and the other foreign-investment-related indexes are important standards to appraise the performance of local governments. In the future, the indexes of the quality of foreign investment and the fields the foreign investment is put in will be added in the appraisal standards.

Thirdly, the Chinese government should avoid turning the state-owned enterprises (SOEs) into the new gainer of the “super national treatment”. The solution is to treat the foreign companies, SOEs and private companies equally and create a fair market environment for them all.