China Country Market
Insights and Opportunities
Foreign Investment Sector
Overview: The growth rate of foreign direct investment (FDI) into China accelerated to 23% in 2008 to $92.3 billion, according to Ministry of Commerce statistics. American FDI in China grew more than 10% in 2008, the first year that U.S. investment in China rose since 2002. According to the United Nations Conference on Trade and Development (UNCTAD), in 2007, mainland China was the world’s sixth largest FDI recipient, after the United States, the United Kingdom, France, Canada, and the Netherlands. (Hong Kong was the world’s seventh largest FDI recipient. Together, the two economies would be ranked fourth.)
China also received the most votes in a 2007 UNCTAD poll of attractive investment destinations, followed by India, the United States, Russia, Brazil, and Vietnam. The American Chamber of Commerce has reported that American firms’ operations in China are more profitable than they are in the United States.
Outbound investment from China has recently increased significantly as China encourages leading domestic firms to acquire key technologies, brands, and access to natural resources abroad, although Chinese investment in U.S. financial institutions has lagged expectations.
While FDI in China shot higher, investors continued to face a range of potential problems that could expose them to risks in the future. Problems foreign investors face in China include lack of transparency, inconsistently enforced laws and regulations, weak IPR protection, corruption, industrial policies that protect and promote local firms, and an unreliable legal system.
In 2008, China continued to lay out a legal and regulatory framework granting it the authority to restrict foreign investment that it deems not to be in China’s national interest. In many ways, the new rules codify standards and practices that China was already employing in its existing, mandatory foreign investment approval process. Key terms and standards in the new regulations are undefined. In fact, China has told the United States that it wants to preserve flexibility for its regulators to approve or block foreign investment projects in response to changing circumstances. In practice, the potential restrictions that China may impose are much broader than those of most developed countries, including the national security review conducted by the Committee on Foreign Investment in the United States (CFIUS).
At the moment, China appears to be using the rules to restrict foreign investments that are:
intended to profit from currency speculation; in sectors where the government is trying to tamp down aggregate capital inflows and inflation; in sectors where China is seeking to cultivate “national champions;” in sectors that have benefited historically from state-authorized monopolies or from a legacy of state investment; in sectors deemed key to social stability, like foodstuffs and heavily polluting industries; and nominally “foreign” investment that is actually Chinese capital that has been exported and re-imported to take advantage of preferential treatment accorded to foreigners.
Although it remains to be seen how many of these rules will be applied, they present several concerns to foreign investors. First, they appear to give regulators significant discretion to shield inefficient or monopolistic enterprises from foreign competition. They are also often applied in a manner that is not transparent. Finally, overall predictability for foreign investors has suffered because investors are less certain that China will approve proposed investment projects. The United States Government has raised its concerns about these laws and regulations and will continue to monitor developments.
At the end of 2008, in response to the weakening economy, China announced a stimulus package that includes fiscal stimulus, business tax cuts, and support for priority sectors that may present foreign investors with new opportunities. The United States is tracking the roll out of this plan and will seek to ensure it is applied in a manner that does not discriminate against foreign investors.
Investment Requirements: China has revised many laws and regulations to conform to WTO investment requirements. At the same time, Chinese industrial planners encourage investments that meet Beijing’s economic development goals. U.S. companies are concerned that encouragement may amount, in many cases, to WTO-prohibited requirements, particularly in light of the high degree of discretion provided to the Chinese officials who review investment applications.
In China, all commercial enterprises require a license from the government. There is no broad right to establish a business. The principle law governing establishment of an enterprise is China’s Administrative Permissions Law, which requires China to review proposed investments for conformity with Chinese laws and regulations, and is the legal basis for China’s complex approval system for foreign investment.
Additional laws govern the forms of enterprises that can be established. Disposition of an enterprise is also tightly regulated. Apart from its legal regime, China makes liberal additional use of administrative regulations that restrict foreigners’ ability to establish investments in some sectors.
While insisting it remains open to inward investment, China’s leadership has also stated that China is actively seeking to target investment in higher value-added sectors, including high technology research and development, advanced manufacturing, energy efficiency, and modern agriculture and services, rather than basic manufacturing. China would also seek to spread the benefits of foreign investment beyond China’s more wealthy coastal areas by encouraging multinationals to establish regional headquarters and operations in Central, Western, and Northeastern China.