Is China Losing Its Appeal to Foreign Capital?


China, as an emerging economy, has experienced slowing economic growth since 2013. For the first eight months of 2014, foreign direct investment (FDI) into non-financial sectors edged down 1.8 percent from the same period in 2013. Certain domestic and overseas media have come to the conclusion that the frenzied influx of foreign capital into China is cooling down. But are they right?


Developing Economies Maintain FDI Uptrend

The status of developing economies is growing, and the trend of FDI flowing into such nations is expected to continue. Economic globalization has been gathering pace since the beginning of the new millennium. Meanwhile, new growth trends are apparent in the world economy. Developed and developing economies are trading off each other to gain the upper hand – a new development pattern since the global financial crisis broke out. In 2012 and 2013, developing economies overtook developed economies as leading FDI destinations. The graph on Page 61 shows how the two groups of economies alternated from 1980 to 2013 in absorbing global FDI.


Appealing Investment Market

China is attracting growing international capital due to its ideal FDI market environment.

The nation owns rich, quality, yet economical labor resources. China National Bureau of Statistics data reveal that each year the country produces more than 6.7 million secondary vocational school graduates, more than 6.2 million college graduates, and almost 500,000 postgraduates. These impressive statistics apart, China’s labor costs are considerably below that of developed countries.

What’s more, China has achieved a complete industrial system, and its economic structure is steadily upgrading. Industrial clusters have formed in some areas, closely connecting upstream and downstream industry chains. Apart from traditional labor-intensive industries like textiles, garments, and furniture, new industrial clusters whose focus is on capital- and technology-intensive industries like IT, automobiles, and steel have taken shape in such areas as the Yangtze River Delta and the Pearl River Delta. Especially in the last decade, service sector clusters, including E-commerce and supply chain management, have come into being. Regional centers for finance, trading, and logistics are also appearing.

On top of all that, the nation has carried out reforms to improve the relationship between the market and government. Since the latter half of 2013, the central government has either cancelled or delegated the power to make hundreds of administrative approvals, notably that ratifying foreign investment, to lower levels. At the same time, China and the U.S. are speeding up negotiations on a Bilateral Investment Treaty, which is expected to boost development of the Chinese investment market. The Shanghai Pilot Free Trade Zone (FTZ) started operating in September 2013, its aim to explore a foreign investor management mode that combines a pre-establishment national treatment with a negative list. In the Shanghai FTZ, 23 industries, including banking, finance, and medical treatment, that were formerly either prohibited or restricted from the Catalogue for the Guidance of Foreign Investment Industries, are now open.

Meanwhile, China learns from and introduces overseas advanced managerial experience to facilitate trade and investment. Better coordination and cooperation among government departments is encouraged – from highly developed coastal areas to less developed inland areas. For instance, memoranda signed by customs and quality supervision departments, and cooperation between industry and commerce departments and tax bureaus have greatly simplified administrative procedures. Moreover, enhanced trans-regional collaborations are beneficial to the country’s integrative growth, effectively allocating historically under-utilized resources to improving economic efficiency.

Furthermore, anti-corruption campaigns have been launched throughout the country and the business environment has been standardized. The government is also transforming its functions. It can be concluded that China’s investment environment has significantly improved, an achievement that would in the short term be out of the question for other Southeast Asian countries.

As reported in the UNCTAD World Investment Prospects Survey 2013-2015, China, U.S., India, Indonesia, and Brazil are the top five destinations for FDI in 2013-2015, according to transnational corporations, while China, the U.S., Germany, the U.K., and France are the top five FDI investor countries in 2013-2015, according to investment promotion agencies. China, followed closely by the United States, heads the list, and is cited by more than 45 percent of all transnational corporation respondents. Sixty percent of investment promotion agency respondents rank China as the most promising source of FDI, surpassing the U.S. by eight percent. The above data come from multiple-options surveys.

The 2014 Business Climate Survey released by the American Chamber of Commerce in China (AmCham China) shows that 23 percent of the American enterprises surveyed saw remarkable year-on-year growth in China in 2014, while 48 percent saw slight growth. Throughout 2011 to 2013, total proportions of “remarkable growth” and “slight growth” have exceeded 70 percent. Moreover, more than half of the respondents believe that China continues to be one of the world’s top three most attractive FDI destinations.

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