Despite worries over the possible impact of a unified corporate income tax on foreign investors, China still managed to absorb more foreign capital in 2006 than in the previous year, adding to its strong growth momentum.

 

However, the significance of the increase in foreign direct investment (FDI) should no longer be measured only by its immediate contribution to the country's economic growth.

 

From now on, policy makers should pay more attention to the long-term role that FDI can play in facilitating change in the country's growth patterns.

 

Commerce Minister Bo Xilai revealed on Monday that China's actualized FDI in 2006 increased by 5 percent to top US$63 billion, reversing the downward trend in the first nine months of last year.

 

Ongoing legislation to unify corporate income taxes for domestic firms and foreign companies, which stand at roughly 33 per cent and 15 per cent respectively, once triggered fears that the country might lose its appeal to foreign investors. But the annual growth of FDI indicates that foreign investors' interest in China remains strong.

 

Given the huge growth potential of China both as a low-cost manufacturing center and an emerging consumer market, most foreign investors are unlikely to put preferential taxation above their long-term development strategy.

 

Meanwhile, foreign investment is also crucial to China's economic growth. Some 280,000 foreign-funded enterprises contribute 27 percent of China's total industrial output value and 57 percent of its exports. Foreign investment also employs 10 percent of China's total number of employees.

 

In addition to such immediate contributions, FDI can also play an important role in helping attain China's goals for long-term growth.

 

If the government can take advantage of the steady FDI growth period to channel more foreign capital into the higher value-added technology-intensive and service sectors, the country can upgrade its industrial structure more quickly to raise the overall efficiency of the national economy.

 

The country has already seen some encouraging changes in this regard. In the first nine months of 2006, foreign capital used by service industries, including real estate, information technology, distribution, tourism and architecture, surged by 14.63 percent year on year to US$11 billion while that in manufacturing industries declined by 6.81 percent to US$34 billion.

 

(China Daily January 16, 2007)