China Can Lure More Foreign Funds

China still has the potential to attract more foreign investment. In order to reap an annual inflow of US$70 billion of foreign investment, the government must develop the market system and further ease its grip on investment flows.

Last year, China's gross domestic product (GDP) stood at 8,205.4 billion yuan (US$990 billion), an increase of 7.1 per cent compared to the previous year.

This exceeds the government's target of a growth rate of 7 per cent for the next five years.

At the current rate of growth, China's GDP will reach 10 trillion yuan (US$1.2 trillion) in 2003. Foreign and domestic investment will remain the engine driving China's economic development forward. The government will continue to implement its pro-active financial policy, although it has now decided to try and keep the investment growth rate at 8 per cent.

Foreign investment, which has been responsible for 17.8 per cent of investment into fixed assets in the past few years, is expected to play a crucial role in increasing the rate of China's economic growth in the years to come.

Analysis shows that China's economic growth results, to a large extent, from the opening of the market and the growth of the inflow of foreign investment.

The growth of foreign investments has generally paralleled increases in the amount of domestic investments.

This growth can be seen clearly, especially during the most robust period of economic growth in China (1990-95).

After 1997, however, foreign investment started to decline and China's economy slowed down. Individual investment was at a low.

The internal factors deciding the rates of China's economic growth, such as the extent to which the market system has been allowed and the degree to which new technologies have been adopted, have effected the amount of foreign investment.

With China's campaign to develop its western regions now unfolding, investors may well be attracted to the area. Traditionally, investors have only been interested in China's coastal areas.

The western regions need to attract investors if they are to fully make use of their rich resources. However, before any investors will risk their capital, the western regions must make strenuous efforts to sharpen their competitive edge by improving its infrastructure, which does not at present allow for economic growth.

Eastern regions need to continue investing in their traditional export-driven manufacturing sectors. However, the east of China also needs to put more emphasis on luring investors to help develop high-tech industries. Biomedicine and electronics should be the main sectors to be further opened to investors.

The grim reality is, however, that the equity of foreign investors are strictly controlled in some sectors, and this has hampered their enthusiasm to invest in China.

Restrictive policies against venture capital has made foreign investment inaccessible to high-tech industries.

The investment approval system is a mass of red tape and as such it has led to a decline of foreign investments in recent years.

If these problems cannot be solved, high-tech industries will not develop.

To benefit from foreign investments, China should try to expand its investment scope.

By the end of 1999, foreign investment in agriculture accounted for only 2 per cent of total foreign investments, the manufacture sector accounted for nearly 60 per cent, and the service sector for nearly 40 per cent.

The restrictive nature of the foreign investment system will, it is believed, soon undergo a big change due to China's desire to join the World Trade Organization.

In the next few years, the proportion of foreign investment going into the manufacture sector will possibly edge down and investments will instead concentrate on finance, telecommunications and the commercial sector.

These changes however, all hinge on the government's policies. In other words, it will be the government who decides which sector will be opened first to foreign investors.

To encourage investment, China still needs to fashion a sound market system. Moreover, China needs to amend some of its current laws, which sometimes clash with international practices.

The country also needs to further open its doors to the outside world and reform investment mechanisms.

Any foreign investment that threatens national interests and security should be banned.

The author is a researcher with the Chinese Academy of International Trade and Economic Co-operation.



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