China’s Enterprises Encouraged to Invest Abroad

By LAN XINZHEN

ON July 19, 2004, the Chinese Ministry of Commerce and Ministry of Foreign Affairs jointly issued the Guide Catalogue of Foreign Countries and Industries Recommended for Investment. It gives information on relevant industries in 67 countries and regions.

The aim of the catalogue is to encourage Chinese companies to invest abroad and is, according to an official from the Ministry of Commerce, an unprecedented move on the part of the Chinese government. To date, more than 7,000 Chinese enterprises have invested in 160 countries and regions.

According to Zhang Zhuoyuan, Researcher at the Economic Research Institute of the Chinese Academy of Social Sciences, the catalogue will provide vital guidelines for Chinese companies as to optimum use of domestic and international markets, the structure of investment abroad and high level international economic and technological cooperation.

Heated Overseas Investment

No longer content merely to attract foreign investment, China is now emerging as an overseas investor. Over the past two years, investment abroad has been on the upsurge since large companies such as Haier, Xoceco and Gree established production, research and development centers abroad.

UNCTAD (UN Conference on Trade and Development) statistics show that in 2003 China’s direct investment abroad exceeded US $35 billion. According to an UNCTAD survey of countries investing abroad, the United States ranks first in terms of investment volume, followed by Germany, Britain, France, China and Japan. This indicates that China has evolved from a country attracting large foreign investment to one that is fast becoming a major overseas investment power.

“To most developing countries, China is likely to take on the image of big investor, second only to the United States,” said Zhan Xiaoning, Director of UNCTAD international investment coordination office.

Data from the Ministry of Commence in 2003 put the number of ministry approved, China-funded non-financial companies abroad at 510 -- a 50 percent increase over 2002. The same data also showed a US $2.087 billion level of contract investment in 2003, a hefty 110 percent increase over the previous year.

Chinese overseas investment goes back to 1979, and Deng Xiaoping’s Open Door policy. It was in November of that year that the Beijing Friendship Commercial Service Co. and a Japanese business established the very first joint venture in Tokyo.

In 2003, the Chinese Government promulgated a policy on supporting companies investing abroad. The Ministry of Commerce and the State Administration of Foreign Exchange later jointly carried out reforms simplifying approval and examination procedures for applications to establish processing trade projects in other countries. This allowed local governments to approve overseas projects of no more than $3 million. According to Wu Xilin, deputy director of the Foreign Economic and Cooperation Department of the Ministry of Commerce, the policy is aimed at boosting China’s investment abroad. Currently, more than 10 countries list China as their biggest investor, and Japan, Britain, Singapore and Sweden have established investment-attracting institutions there. China’s overseas investment is geared mainly towards the processing industry, agricultural products, natural resource development and service trade.

The Ministry of Commerce launched an information platform through the Internet on July 20, 2004 to help Chinese investors exchange information with their foreign counterparts. It provides information on companies interested in investing abroad, projects in other countries that need investment, and investment intermediary institutions.

An upsurge of Chinese investment abroad is imminent, predicts Zhan Xiaoning.

Development Prospects

In spite of rapid growth in China’s direct investment in other countries and regions, it still has limited volume, says Zhao Chunming, professor at Beijing Normal University.

The low level of technology in projects funded by China is also a big problem. China has invested in some technology-based projects in the past few years, but the percentage is still very low. Owing to stiff competition emanating from low-technology projects invested by other developing countries, China’s are not well placed on the overseas market.

Each Western transnational company has its global strategy. China’s low investment impedes it from forming an international network, and puts it at a disadvantage within international competition. In addition, the main recipients of Chinese capital are developing countries whose investment and political environments lack stability. In order to minimize risks for Chinese investors, the government has taken steps to assist enterprises investing abroad, inclusive of making loan and financial arrangement and providing credit guarantees.

China has, in effect, formulated a series of preferential policies to encourage companies to invest abroad. Companies investing in resource development projects, for instance, can apply either for foreign exchange or low-interest RMB loans from the government. Projects designed to aid other countries can be incorporated into the state’s foreign aid plan, and funds for the projects granted by the government are accordingly treated as foreign aid capital. When products made by China-funded companies abroad are those that China would normally import, they are included in the state privileged import plan.

Currently, the number of China’s mainland’s enterprises in Hong Kong and Macao make up 46.8 percent of its overseas total, and those in North America account for 13.7 percent. China’s overseas investment makes up only 0.15 percent of world total direct foreign investment. According to statistics, the ratio of absorbed foreign investment and investment in other countries is as follows:

Developed countries      1:1.14

Developing countries     1:0.13

China      1:0.09.

This indicates that China is still at the primary stage of overseas investment. China’s investment abroad, however, is increasing. In the past 10 years, the annual growth rate averaged 76.8 percent, says Professor Zhao, indicating an increased Chinese influence within the world investment market.