Foreign direct investment (FDI) in China is forecast to continue
on its upward climb from now until 2010, averaging US$85.7 billion
and ranking it third in the world, behind the US and the UK
respectively, according to World Investment Prospects to 2010:
Boom or Backlash, a report released on September 5 by the
Economist Intelligence Unit (EIU), the business information arm of
The Economist, and the Columbia Program on International
Investment (CPII).
According to the report, major investors in China are Hong Kong,
the Virgin Islands, South Korea, Japan and the US, which in 2005
accounted for 29.7 percent, 14.9 percent, 10.8 percent, 8.6 percent
and 5.1 percent of total FDI respectively. Most of the investments
have been in the coastal provinces and second-tier cities.
The report also points out that there are signs of unease within
China because some observers are beginning to see "an excessive
dependence on FDI" and the negative effects of investment
saturation in certain industries.
But Robin Bew, editorial director of the EIU, doesn't agree that
FDI inflow into China is excessive. It is still the local
businesses that are driving the economy, Bew told Beijing
Review, adding that restricting FDI would be a big mistake
because FDI drives domestic businesses to constantly improve and be
more competitive.
Bew was referring to the Chinese government's conservative
attitude toward inward FDI, which is considered by many as a form
of control or restriction.
"There may be some restriction (on FDI) in some specific areas,
but it will not result in a backlash (of FDI in China)."
According to the report, China is still the preferred investment
destination of many international firms. Its commitment to meeting
its WTO obligations is a further boost to FDI inflow.
The report reads: "The gradual opening up of sectors such as
domestic commerce, financial services, insurance and tourism is
underway. Restrictions in terms of the geographical areas in which
foreign companies are allowed to set up operations will also be
relaxed in 2006-10."
Despite the positive potential of an FDI boom in China, the
report also indicates factors that could dampen the situation,
including intense price competition, rising raw material prices and
corporate tax adjustments for both domestic and foreign firms
expected in 2008. Currently, foreign companies operating in China
enjoy a preferential tax rate of 15 percent, compared with 33
percent for Chinese firms.
Hence the prediction that most of the FDI will be diverted from
China to cheaper locations.
"FDI is not a zero-sum game. For example, we forecast that the
gap between FDI inflows to China and ASEAN countries will narrow
during the period 2006-10," noted Karl P. Sauvant, executive
director of the CPII and one of the editors of the report.
The CPII is a joint undertaking of the Columbia Law School and
the Earth Institute at Columbia University, which focuses on the
analysis and teaching of the impact of FDI on public policy and
international investment law. The EIU is a leading provider of
country intelligence. It assesses and forecasts political, economic
and business conditions in 195 countries.
(Chen Wen, Beijing Review, reporting from New York,
September 7)
Related:
[PDF] World Investment Prospects to 2010: Boom or
Backlash