Is China's Investment Environment Compromised?

By staff reporter LIU QIONG

On March 31, only one week after Google cited Internet censorship as the reason for moving its search engine from China's mainland to Hong Kong, the Microsoft China Technology Park opened in Shanghai, becoming the software giant's first offshore harbor for research, development and technical support. Representing an investment of nearly RMB 700 million, the facility is widely perceived as confirmation of the confidence international business circles still hold in China at a time when the world is barely clear of a serious economic slump.

Responding to worries about the fate of foreign investment in China and the clamor over Google's retreat, Microsoft co-founder Bill Gates made a point of saying on ABC's Good Morning America that the Internet is subject to different kinds of censorship all around the world but has proved consistently and ultimately successful at promoting openness and revving up an exchange of ideas. He pointed out that almost all countries, including the United States, have laws and policies that people dispute. "You've got to decide: Do you want to obey the laws of the countries you're in, or not? If not, you may not end up doing business there."

While the resentment over Google's move lingers on, the sensation around the Rio Tinto case flared up again on March 29, when four of the Australian mining company's employees were sentenced to jail by Shanghai No.1 Intermediate People's Court; the terms handed the men ranged from seven to 14 years for taking bribes and stealing commercial secrets. Some foreign media fabricated connections between the two incidents, sparkling a spate of discussions on whether the investment environment in China is on the slippery slope to degradation.

China Still Hot

Google closed its operation in the mainland in March. China Foto Press

"Google and Rio Tinto are merely two individual business cases, and won't negatively impact China's investment climate," Vice Commerce Minister Chen Jian told reporters confidently at the China Jilin Northeast Asia Investment and Trade Expo in April. Google, he pointed out, is like any other international company; it entered the Chinese market promising to observe local laws; unlike other companies it didn't keep its word. It's the company's choice to move off the mainland, and basically this has no impact on the nation's investment environment in general. As for the Rio Tinto case, Mr. Chen is clear that this is an outright violation of criminal law. "China won't abandon its strategy of opening up, but it nevertheless must run its economy according to law. There is room in China for all law-abiding businesses to enjoy strong growth," Mr. Chen stressed.

It's not difficult to name a few examples. L'Oreal's 2009 sales in China soared by 17.6 percent over 2008 to reach RMB 8.18 billion, the ninth annual two-digit accruement. For years in a row Siemens's annual growth in sales income and the increase of new orders in the Chinese market remained at around 20 percent. Defying the chill of the 2009 economic crisis its sales income in the Chinese market increased by seven percent.

Japanese automaker Nissan led the market expansion race among foreign brands in China in 2009. Sales of its Nissan and Infiniti cars in the nation amounted to 756,000, a 39 percent leap over 2008. "Nissan had wonderful performance in China in 2009," confirmed Yasuaki Hashimoto, president of Nissan China Investment Co., Ltd. (NCIC), though he admits "facing grim challenges from the global financial crisis." He is justifiably optimistic, since Nissan maintains its healthy dynamics in the Chinese market. Mr. Hashimoto credits the congenial environment for foreign investment in China as the underlying factor in the company's robust growth. "NCIC and the two Nissan joint-ventures – Dongfeng Motor and Zhengzhou Nissan Automobile – all cite their close cooperation with local partners as instrumental in their brisk development in China. High-quality educational institutions in China supply skilled and competent workers for the auto industry. Chinese human resources are vital to the growth of the sector as a whole."

The AmCham-China 2010 Business Climate Survey Report, released in late March, indicated that, as in previous years, more than 75 percent of foreign companies in the nation place China within their top-three priorities for global investment plans in 2010. Seeing a profit rate hovering above average compared to other parts of the world, approximately 80 percent of American companies currently in China are evaluating stepping up their investment.

Leveling the Playing Field

"The misgiving about China's business climate among foreign companies is actually rooted in unease over the perceived decrease in market opportunities," analyzed Zhao Zhongxiu, president of the School of International Trade and Economics of the University of International Business and Economics. For the past 30 years China has been wooing foreign investment with many preferential policies designed to bag badly needed capital, advanced technology, and management expertise. The volume of foreign investment is often used as a key measure of a local government's competence. The situation means foreign-funded companies enjoy tax privileges that are denied their Chinese counterparts, state-owned or private.

Now China is scaling back tax largesse for international companies, placing them on the same footing as their Chinese peers. Mr. Zhao believes the shift can boost healthy market competition and corporate efficiency in the long run, but is chagrined by some foreign investors angling so narrowly for immediate gains. "Transnational businesses measure four leading factors when considering investment in a region," Zhao explained. "The first is politics and the legal system. The top concerns in this regard include political stability, policy continuity, a complete functioning legal system and a proper judiciary. The second is the health of the local economy. Criteria for that include state of the macro-economy and the markets, supporting infrastructure and economic policies. Thirdly, social and cultural components, such as education, religion and customs, form a crucial dimension. The fourth is the development level of a region's science and technology sectors." Zhao said that China excels in all these evaluation aspects, so the appeal to foreign investors is no mystery.

After China joined the WTO on December 11, 2001 overseas investment underwent a marked surge in volume as well as greater diversification. It extended from assembly lines outwards to both ends of the manufacturing production chain, from research and development at one end to marketing and after-sale service at the other. Meanwhile, domestic industries increase in their variety, specifically into heavy chemistry, commerce, insurance and logistics. "China is gradually optimizing its investment environment, introducing the latest concepts on promoting investment, and embracing international financial practices," Mr. Zhao explained. Movement in the right direction includes efforts to build a unified, open, competitive but ordered market system, improvement in investment-related laws, enhancement of judicial mechanisms and improved efficiency in government work.

"For foreign companies whose operations are sustained by preferential policies, and most certainly those who bet their fortune on the exploitation of loopholes or gray zones in Chinese laws, hopes are fast fading that they can hold their own in the nation," Mr. Zhao warned.

New and Improved

"Worldwide transnational investment fell by 40 percent in 2009 under the crush of the financial crisis. By contrast, China maintained its 2008 level. This testifies to the exuberance of China's investment climate and the market in general. In this economy, the entrepreneurs have legs; we don't look to what comes out of the mouths of politicians or reporters," said Zhang Xiaoqiang, deputy chief of the National Development and Reform Commission, describing China's can-do attitude at sideline discussions on Asia's growth pattern at the Bo'ao Forum for Asia in mid-April.

Mr. Zhang said China welcomes foreign investment conducive to optimization of China's growth within its current pattern. That means investment in high tech and service industries and whatever taps into China's huge labor pool. But the door has closed on those who come here to gobble down energy and other resources and spew out heavy pollution.

On April 13 the State Council (Chinese cabinet) released Opinions on Better Use of Foreign Investment, which proposes revisions to the Guide Book on Industries for Foreign Investment with an aim to encourage foreign capital influx to high-end manufacturing, new- and hi-tech, modern services, and new energy, energy-saving or environment-friendly sectors. The policy adjustment has in no way checked the flow of foreign investment in the country – quite the opposite. Statistics from the Ministry of Commerce show that in the first quarter of 2010 China realized a foreign investment increase of 7.65 percent over the same period of last year – to US $23.443 billion. What's more, there are 5,459 newly approved foreign-funded companies that represent a surge of 19.87 percent over 2009. "The main reasons for the increase in direct foreign investment," concluded Deputy Commerce Minister Ma Xiuhong, "are the steady growth of the macroeconomy and our improved investment environment."