China

The growth rate of foreign direct investment (FDI) into China accelerated to 23% in 2008 to $92.3 billion, according to Ministry of Commerce statistics. American FDI in China grew more than 10% in 2008, the first year that U.S. investment in China rose since 2002. According to the United Nations Conference on Trade and Development (UNCTAD), in 2007, mainland China was the world’s sixth largest FDI recipient, after the United States, the United Kingdom, France, Canada, and the Netherlands. (Hong Kong was the world’s seventh largest FDI recipient. Together, the two economies would be ranked fourth.)

China also received the most votes in a 2007 UNCTAD poll of attractive investment destinations, followed by India, the United States, Russia, Brazil, and Vietnam. The American Chamber of Commerce has reported that American firms’ operations in China are more profitable than they are in the United States.

Outbound investment from China has recently increased significantly as China encourages leading domestic firms to acquire key technologies, brands, and access to natural resources abroad, although Chinese investment in U.S. financial institutions has lagged expectations.

While FDI in China shot higher, investors continued to face a range of potential problems that could expose them to risks in the future. Problems foreign investors face in China include lack of transparency, inconsistently enforced laws and regulations, weak IPR protection, corruption, industrial policies that protect and promote local firms, and an unreliable legal system.

In 2008, China continued to lay out a legal and regulatory framework granting it the authority to restrict foreign investment that it deems not to be in China’s national interest. In many ways, the new rules, which are outlined in more detail below, codify standards and practices that China was already employing in its existing, mandatory foreign investment approval process. Key terms and standards in the new regulations are undefined. In fact, China has told the United States that it wants to preserve flexibility for its regulators to approve or block foreign investment projects in response to changing circumstances. In practice, the potential restrictions that China may impose are much broader than those of most developed countries, including the national security review conducted by the Committee on Foreign Investment in the United States (CFIUS).

At the moment, China appears to be using the rules to restrict foreign investments that are:

• intended to profit from currency speculation;
• in sectors where the government is trying to tamp down aggregate capital inflows and inflation;
• in sectors where China is seeking to cultivate “national champions;”
• in sectors that have benefited historically from state-authorized monopolies or from a legacy of state investment;
• in sectors deemed key to social stability, like foodstuffs and heavily polluting industries; and
• nominally “foreign” investment that is actually Chinese capital that has been exported and re-imported to take advantage of preferential treatment accorded to foreigners.

Investment Guidelines

While insisting it remains open to inward investment, China’s leadership has also stated that China is actively seeking to target investment in higher value-added sectors, including high technology research and development, advanced manufacturing, energy efficiency, and modern agriculture and services, rather than basic manufacturing. China would also seek to spread the benefits of foreign investment beyond China’s more wealthy coastal areas by encouraging multinationals to establish regional headquarters and operations in Central, Western, and Northeastern China.

Five Year Plan

China defines its broad economic goals through five-year macro-economic plans. The most significant of these for foreign investors is China’s Five-Year Plan for Foreign Investment. The most recent version was released in November 2006 and promised a greater scrutiny of foreign capital utilization. The plan calls for the realization of a “fundamental shift” from “quantity” to “quality” in foreign investment from 2006 to 2010.

According to the document, the focus of China’s investment policy should change from shoring up domestic capital and foreign exchange shortfalls to introducing advanced technology, management expertise, and talent. There should be more attention to ecology, environment, and energy efficiency. The document also demands tighter tax supervision of foreign enterprises, and seeks to restrict foreigners’ acquisition of “dragon head” enterprises (i.e., premier Chinese firms), prevent the “emergence or expansion of foreign capital monopolies,” protect national economic security, particularly “industry security,” and prevent “abuse of intellectual property.”