Searching for FDI Stability

The Intel Dalian plant, one of the most advanced Intel manufacturing facilities. Intel has a total investment of $4 billion in China [Photo/Cai Yongjun]

China now faces a sharp decline of foreign direct investment (FDI). What are the reasons for the drop, and how should China promote steady FDI growth? Huo Jianguo, President of the Chinese Academy of International Trade and Economic Cooperation, shared hisviews in an article for Securities Daily. Edited excerpts follow:

Since China adopted its reform and opening-up policy in the late 1970s, foreign investment has played an active role in promoting China's economic development. However, according to figures from the Ministry of Commerce (MOFCOM), in the first four months this year, the number of newly established foreign-invested enterprises was 7,016, a year-on-year decline of almost 14 percent. The paid-in capital totaled $37.88 billion, dropping 2.38 percent from a year ago. In fact, since November 2011, the paid-in capital has been decreasing, imposing new pressure on China's economic and trade growth and causing market worries about China's environment of utilizing foreign investment. Though the decline of FDI is closely related to the downturn of the global economy, the problems behind the phenomenon still need careful analysis and should be properly handled.

Reasons for the drop

The FDI slowdown in the global market is the direct reason causing the drop of paidin capital in China. A report released by the United Nations Conference on Trade and Development said in 2012 the total global foreign investment is expected to reach $1.6 trillion, slightly higher than last year's $1.5 trillion. This indicates that the weak global economy, especially economic recession in developed countries, has curbed the global scale of direct investment. Direct investment in the global market will remain downturn in the short run.

Advantages in China's eastern region are weakening, leading to a decline of the use of foreign investment. Of the total foreign investment China has attracted, 85 percent goes to the eastern region. In recent years, due to restrictions on resources and rising prices for raw materials and labor in this region, the profit rates for foreign investors dropped and investment returns lowered. Therefore some foreign investors are no longer willing to make or increase investment in the eastern region. Moreover, since the existing volume of FDI in the eastern region is already quite large, it is unlikely for the FDI to maintain high growth under the background of a global economic slowdown.

China is also readjusting its policies of utilizing foreign investment. Since 2000, as the Chinese economy developed and the exportoriented economy took center stage, China has adopted active and effective measures to improve the quality of utilizing foreign investment. Focus of the policy has been transferred from extensive expansion of the amount of foreign investment to the quality and benefits of utilizing foreign investment. Therefore, the decline of the amount of paid-in capital shows that the policy readjustment has worked, and the structure and quality of foreign investment are being improved.