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China's FDI entered a phase of steady rises
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16:11, July 11, 2007

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China has now entered a new phase of steady rises in foreign direct investment (FDI); the period of rapid FDI growth has ended, according to Shen Danyang, a researcher with the Chinese Academy of International Trade and Economic Cooperation.

Although China's foreign direct investment increased over 10 percent year-on-year, in the first four months of this year; China's FDI appeal has shown a downward trend compared with the rapid growth in previous years. Shen said that the number of newly-approved foreign-invested ventures in China dropped by 2.3 percent between January and April.

How should we look at this trend? A People''s Daily reporter had an exclusive interview with Shen Danyang on the issue.

Neighboring countries form competition against China
Question: Why does China's FDI appeal show a downward trend?

Shen Danyang: China, in recent years, has experienced an unsteady rise in foreign investment from its major sources - the US, Japan and the European Union. In 2005, the US's investment in China dropped by 22 percent. Between January and September 2006, actual investment from the US decreased by 14 percent. A large amount of foreign funds from transnational companies have returned to the US, and such a trend is likely to continue. Foreign direct investment from the US is likely to decrease. In the meantime, emerging developing-countries such as India have strengthened their ability to attract foreign investment. The rise of neighboring countries puts great pressure on China to draw in foreign investment.

Although China's economic growth will slow down this year as predicted, its overall growth will change. Generally speaking, China's investment environment is favorable. However, some factors have significantly affected China''s absorption of foreign funds. First of all, China's ability to attract FDI with a cost advantage has weakened. Secondly, China issued policies this year regulating the use of foreign direct investment. These policies will have a direct impact on foreign investment in the real estate, and mergers and acquisitions (M&As) sectors. Thirdly, the approval of a unified corporate income tax law by the Chinese government earlier this year has forced foreign enterprises to have a more lax attitude, rather than plan to come to China. Of course, foreigners investing in China are not only attracted by tax preferences, but also to infrastructure, industrialization and market capacity. Thus, China's new corporate income tax law will not reduce the country''s appeal to foreign investors, but will only have an impact on small firms.

In addition, some key factors affecting international capital flow should be highlighted. First of all, foreign investors attach greater importance to the government's credit, an enterprise's property rights, law enforcement, technology standards and a humane environment. Secondly, property investment, demands in share holding, and types of foreign-invested ventures, are also factors foreign investors consider when they plan to do business in different countries. Thirdly, luring foreign funds by relying solely on government subsidy or tax preferential policies will not work all the time. Fourthly, human resources may be a key factor influencing foreign investors when choosing where to invest.

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