Foreign direct investment (FDI) to China dipped 0.5 percent year-on-year to US$60.325 billion last year, excluding investment in the banking, insurance and the securities sectors, according to latest statistics from the Ministry of Commerce (MOFCOM).

 

This is the first time FDI has fallen since 1999.

 

Optimistic outlook

 

Commenting on this decline, Long Guoqiang, deputy director of the Foreign Economic Department under the State Council Development Research Center, said that it is hard to maintain annual increases after years of continued rapid growth.

 

FDI hit a whopping US$60.63 billion in 2004.

 

A temporary slowdown and adjustment to new levels of FDI utilization are natural and necessary, Long said, expecting that China will attract US$80 billion to US$100 billion worth of FDI in the middle and later phases of the 11th Five-Year Plan period (2006-10).

 

Long admitted several factors that could have affected last year's FDI results. From his investigations and studies, he found that some government macro control policies, tightened land supply for example, had delayed the progress of some foreign investment projects.

 

However, Long said, the situation is only temporary and should not affect the long-term utilization of FDI, and he is optimistic about China's potential in attracting more foreign investment.

 

He noted that China has huge potential and is further opening up its markets. Another advantage China has is its low labor cost. Although these costs have gone up in recent years, Long believes that they can be offset through efficiency improvements.

 

Long believes that the domestic market also has the potential to attract FDI.

 

Many foreign investors currently only regard China as an export base and do not directly focus on its domestic market. However, as the sixth largest economy in the world, Long said this could change.

 

Service trade: an important area for FDI

 

Minister of Commerce Bo Xilai said that the service sector will become an important area for attracting foreign investment and for cooperation with foreign companies.

 

In many developed countries, some 33 percent of FDI is concentrated in the modern services industry. Bo said China should learn from these countries in this respect.

 

The service trade can help enhance China's global competitiveness, ease employment pressures and create a better environment for foreign investment, Bo said.

 

Currently, China's service trade faces several challenges to its development. For one, it lags far behind cargo trade. In addition, it is bogged down by a growing trade deficit. Further, the services that have a competitive advantage are concentrated in traditional industries such as ocean shipping and tourism; modern service industries such as finance, insurance and computer services lack the edge to compete in the global marketplace.

 

Bo said that the government will actively promote the development of the service industry and service trade to undertake the transfer of international services, creating an important base for global services outsourcing.

 

Foreign trade: not threatening China's economic lifeline

 

China's personal savings and forex reserves amounted to 14 trillion yuan (US$1.7 trillion) and US$818.9 billion respectively at the end of last year. This has aroused public concern as to whether China should attract more foreign investment if this means possibly threatening China's economic security.

 

Hu Jingyan, director of MOFCOM's Foreign Investment Administration, addressing these concerns, said: "Foreign investment does not have a monopoly in any sector. Therefore, it cannot control China's economic lifeline."

 

Currently, foreign investment accounts for less than 3 percent of the market share in industries that are the pillars of the Chinese economy. Foreign investment mainly focuses on the high-tech, equipment manufacturing and electronics industries, which witnessed the fastest exports growth.

 

Hu added that the personal savings and forex reserves figures are no cause for alarm, particularly since current FDI volume into China is far from adequate. 

 

Accumulated FDI amounted to US$600 billion, or 35 percent of the country's gross domestic product, a little higher than the global average. However, China's per capita foreign investment stood at only US$41, less than half the global average, according to Hu.

 

At a time when countries are vying for foreign investment, MOFCOM will implement stable and continuous foreign investment policies so as to remain competitive.

 

Long Guoqiang added that foreign investment has benefited China in many ways, including the injection of capital, technology, management, brands and talent -- all crucial items for the survival of China's export-oriented economy.

 

Optimizing China's foreign investment structure

 

Long highlighted that government policies should be constantly updated and kept in line with real conditions. He pointed out that the government should strengthen its management of salaries and environmental pollution, maintain social responsibility when utilizing foreign investment, and encourage more domestic enterprises to share in the management of technology and personnel resources.

 

Further, the government should unify existing corporate tax systems as soon as possible. FDI will not be readily forthcoming in the absence of any clear comprehensive policies.

 

According to guidelines to the 11th Five-Year Plan, Long said that China would not go after increasing foreign investment volume alone, but will also be focusing a lot more on developing core technologies, and supporting the good working relationship between domestic and foreign enterprises. Further, in the name of globalization, China would be well placed to stress the importance of independent innovations, and of establishing China-led multinationals.

 

(China Economic Times, translated by Yuan Fang for China.org.cn, January 24, 2006)