China Trend Analysis IV: Economic Trends, Foreign Investment

Part II: Foreign Investment


Foreign Investment has given China’s economy much of the monetary and intellectual capital to sustain such high levels of growth. As an integral part of Deng Xiaopeng’s economic reform package, enticing foreign investment through the establishment of SEZs and other policy reforms has played major role in each of the Five-Year plans upon which Chinese economic planners base their work.

Special Economic Zones provide bubbles of relaxed taxation, and fewer bureaucratic hurdles for investors. As of 2008 there were over 2000 SEZs in China, and though they are different in their objectives and thus incentives, they constitute many of the wealthiest areas of mainland China.

In 2005 the total amount of Foreign Direct Investment (FDI) reached over 70 billion USD, and included international companies like Dell, GM, GE, Boeing, and Cargill. As of the first quarter of 2008, the total amount of FDI in China had already eclipsed 35 billion USD, perhaps indicating a continuing growing trend. However, also in 2005, China released a revised edition of its “Encouraged Industry Catalogue,” which may have changed FDI into China.

The Encouraged Industry Catalogue divides various industries into distinct categories to direct the flow of investment: “encouraged,” “restricted,” and “to-be-eliminated.” These categories are relatively self-explanatory in terms of how foreign Many new industries, many of which are pollution heavy, were added to the “to-be-eliminated” category in China’s policy efforts to encourage “Quality-not-Quantity.” Though speculation still abounds as to the long-term effects of this policy move in regards to FDI, as of the publishing of this post, FDI continues to grow in the PRC.

Of the more than 50 billion USD that have flowed into the PRC in the first half of 2008, a majority source of this income has been from established companies from the Forbes 500 list. There is much speculation concerning this influx of monies in connection with a revaluation of the Chinese Yuan, an move that could have very long term impacts on the Chinese economy.

Another remarkable trend concerning Foreign Direct Investment is also growing – investment by the People’s Republic of China in other developing nations across the globe. It was reported by the People’s Daily in 2007 that the total amount of Chinese Foreign Investment in other countries had exceeded 76 Billion USD in total. It also marked the total amount of outgoing FDI as over $16 billion in 2006 alone, having grown by nearly 35 % from 2005. This money is spread out to some 160 nations, but there is particular investment in Africa, South America, and other parts of Asia.

Investment by China is being spurred by a number of factors, including the continued growth in demand for natural resources, concerns about over-population, and profiteering by China’s industrial leaders. As of 2006, the PRC was investing an approximate $8 billion USD in Latin America. President Hu Jintao publicly announced China’s plan to invest over $100 billion in the region over the next decade, including $20 in Argentina’s infrastructure.

China’s interest in Africa recently garnered the attention of the New York Times with this article. The growing amount of Chinese workers, factories, and investments in Africa have gained the attention of a number of western powers, partly due to the scope of the PRC’s strategy, partly from the practices that have been employed. Some analysts have proposed that China plans to relocate over 300 million people to the continent, and already China utilizes over 70% of Africa’s available resources. The Chinese are being criticized for arms sales, supporting corrupted regimes, and the destruction of local economies.