News Analysis: Future of Chinese-Foreign Joint Ventures

As the top legislature of China began debates on an amendment to the law of Chinese-foreign equity joint ventures Friday, the future of China's numerous joint ventures has become a source of wide concern at home and abroad.

The proposed amendment is a major move on the part of China to prepare for its expected accession to the World Trade Organization (WTO) after more than a decade of negotiations.

It also came at a time when more and more foreign investment projects in China are held or solely-owned by foreign businesses.

Since the founding of the Beijing Aviation Food Company, China's first joint venture in 1980, the country has seen the registration of 150,000 Chinese-foreign joint ventures.

Before 1998, over 70 percent of foreign investment in China took the form of joint ventures.

The growth of Chinese-foreign joint ventures, however, has been slowing down in recent years.

In 2000, growth of wholly foreign-owned businesses exceeded that of Chinese-foreign joint ventures, for the first time.

According to figures from the Ministry of Foreign Trade and Economic Co-operation (MOFTEC), wholly foreign-owned enterprises accounted for 45 percent of total foreign investment in China in 2000.

Meanwhile, actualized foreign investment in joint ventures recorded the first ever negative growth, despite a 21 percent rise in the number of joint ventures last year.

More and more foreign partners have shown a strong interest to increase their stake in joint ventures.

Beijing Jeep, the first joint venture in China's automobile industry, announced not long ago that its foreign partner, DaimlerChrysler, will increase its equity share in the joint venture at a proper time, and that the new management will be headed by a foreigner.

Procter & Gamble (Guangzhou) Ltd., a Sino-U.S. joint venture, also reported drastic changes in the equity structure of many of its subsidiaries. In one of them, the stake of the Chinese side dropped from the original 50 to one percent.

Ma Yu, a senior researcher with the MOFTEC, attributed the change to new trends in China's economic environment.

With a sellers' market being replaced by a buyers' market in China, market competition has intensified, forcing joint ventures to expand their production scale and upgrade their technologies.

In this situation, it is natural for the foreign side to seek a controlling stake to avoid potential conflicts with the Chinese partner, who may harbor a different business philogophy and have a different opeational style and a different goal, Ma said.

Analysts here points out that it is crucial for China to establish a modern corporate system in its state-owned enterprises and improve its investment environment, including the establishment of a judicial system based on a market economy, if it is to reverse the situation of decreasing foreign investment in joint ventures.

China's draft outline of the 10th five-year plan has provided for giving national treatment to foreign-funded enterprises, unified and transparent market accession policies and the removal of equity structure restrictions in joint ventures, except for those that are related to national and economic security.

Analysts said this is surely a move in the right direction.

As the biggest potential market in the world, China's accession to the WTO is expected to trigger off a new round of foreign investment.

"As long as China is not obssessed with having controlling stakes, Chinese-foreign joint ventures will remain the most important form of foreign investment in China, and will continue to contribute to the upgrading of China's state-owned enterprises and its traditional industries," Ma said.






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