China Still a Mecca for Foreign Direct Investment
By HU JIANGYUN
China’s policies for growth haven’t changed. The country has stuck to its basic state policies and furthered the domestic reform agenda. It has opened its doors to the outside world wider than ever before.
THE world economy has had a tough time of it recently. After the financial crisis it staggered along, and looked to be almost up on its feet till the Eurozone sovereign debt crisis blew up in its face.
The shrapnel from the explosion of the debt crisis lodged itself all over the world. China’s economy was one of the lucky ones; it escaped relatively unharmed, having taken cover behind a well-regulated financial market and a barricade of stimulus money. China has managed to maintain its above-average growth rate; in 2012, the world’s largest developing country boasted seven percent GDP growth.
But escaping relatively unharmed does not mean there was no damage. In the first half of last year global foreign direct investment (FDI) took a nosedive. Against a backdrop of double-digit FDI slumps in the U.S. and India, China’s economy also suffered, registering a three percent fall in FDI compared with the corresponding period a year earlier. Its 2012 inbound FDI totaled about US $110 billion.
As news hit the markets about the drop in FDI into China, the punditocracy went into overdrive. This was it for China, they said; the country’s economy had had its run. They pointed to territorial disputes over the South China Sea and the East China Sea as evidence that a full-blown cataclysm was on its way.
The talk was overblown. On the economic face of it, the FDI drop was an indication of the interconnectivity between China and the world. The world suffers, and China feels it. Nevertheless, the fundamentals of the Chinese economy are sound. And according to my estimates and research, China should be set to attract a great deal more FDI in the coming years.
China’s policies for growth haven’t changed. The country has stuck to its basic state policies and furthered the domestic reform agenda. It has opened its doors to the outside world wider than ever before. In its development, China has worked its way through many of the problems that have plagued developing countries in the past. It has put social progress and societal cohesion on equal par with economic progress.
All these ideals were enshrined in a report released at the 18th CPC National Congress in 2012. “Opening-up” was again stressed, as was the goal to “comprehensively reconfigure” the structure of the nation’s economy.
China remains one of the primary engines of world economic growth. Its successful development has been vital to the well-being of many global markets. A research report released by my organization, the Development Research Center of the State Council, shows that China has made key contributions to world economic growth in recent years. It has provided inexpensive, high-quality manufactured products for industries in the U.S., Japan, the EU and many other countries. It also imports large volumes of primary products and raw materials from other developing countries, which in turn boosts standards of living in those countries.
In both the 1997 Asian Financial Crisis and the current world financial malaise, China has carried out, in a timely manner, policies to expand domestic demand, which has boosted employment in export industries around the world. This has promoted global recovery.
There’s no doubt China still has a long way to go. According to statistics from the World Bank, China’s Gross National Income per capita in 2011 reached US $4,940. Calculated according to purchasing power parity (PPP), which takes into account relative prices between countries, the per capita figure rises to above US $8,000, firmly cementing China a place among the ranks of middle-income countries. It’s a tremendous achievement, but it will still take the effort of the entire nation to “catch up” with developed nations. As its population becomes increasingly urbanized, it’s the country’s huge domestic demand potential that should propel its economy to greater heights in the future.
China’s honed capability of providing auxiliary items used in relevant industries, combined with its extensive development of industrial clusters and special economic zones, allows foreign enterprises to prosper in the country. In the process of opening up, China learned advanced processing and manufacturing techniques and modern management experience.
Industrial clusters have been crucial to Chinese industries’ rise up the value chain. Of all the country’s industrial clusters, perhaps the Yangtze River Delta area has been the most successful. There, one finds town-sized conglomerations of producers of electronic devices, auto parts and daily necessities. The Pearl River Delta area, home to many plastic and rubber parts and building materials businesses, has also been immensely successful. The two regions’ strong producing and manufacturing capability brings quality, convenience, promptness and other benefits to foreign-invested companies. It cuts costs and improves productivity.
The 2012 White Paper of the American Chamber of Commerce in China (AmCham China) reports that 76 percent of interviewed foreign-invested companies expect a rise in their revenues in China in 2012, and 26 percent predict an 11 to 20 percent rise. Most of AmCham’s member companies believed that their companies’ growth rate would exceed China’s GDP in 2012 – just as they had thought in surveys from the two previous years. They also said – and perhaps most crucially – that they are making profits in China. Thirty-nine percent of interviewees revealed that their profit margins in China had surpassed their world average in 2011.
Various open platforms and innovative services have been unveiled in the country in order to attract foreign investments. Local governments have encouraged innovation in their work and policy formulation. They have set up special economic zones, economic and technological development zones, high-tech industry parks, tourism resorts, border economic cooperation zones, bonded zones, export processing zones, bonded logistics parks, bonded ports, comprehensive bonded zones, reform pilot zones, opening-up pilot zones and many other forms of investment incentives. These have attracted foreign investments, and blazed the way for China’s further opening up and exploration of new paths to development.
As to the statistics by the United Nations Conference on Trade and Development (UNCTAD), from 2001 to 2011, China’s FDI stock per capita had been 9 to 18 percent of the world average level. Its “FDI stock to GDP” ratio was 7.9 to 22.7 percentage points lower than the world average. These statistics imply that China still does not receive adequate levels of FDI inflows. There is massive room for growth.
In recent years, China’s labor costs have been on the rise, as have the prices of land and raw materials in the country. But such phenomena are common to the country’s neighbors, and are indeed ubiquitous across the globe.
Rising costs can be offset by employing innovative technology, modern effective management techniques and economies of scale to increase productivity.
The majority of foreign-invested companies in China have been making profits. The unparalleled advantages of the country’s huge market, and the high efficiency of its ability to allocate resources where they are needed are key incentives that attract multinationals and other foreign companies to China. And these fundamentals are unlikely to change any time soon.
