Foreign firms still betting on China
Editor’s note: Once again, the judgment is being trotted out that China is experiencing an outflow of foreign capital based on the withdrawal of a few foreign companies. Is this really the case? Three experts share their views on the issue with China Daily’s Liu Jianna. Excerpts follow:
Hard facts show FDI is on the up
Some labor-intensive industries are indeed relocating to other countries, especially Southeast Asian countries where labor costs are relatively low. Yet this is not a new phenomenon, neither is it a consequence of the China-US trade dispute, which has experienced many twists and turns over the last few months.
Given the rising cost of labor in China and the advancing of its industry upgrading, the shift of China’s competitive advantage from inexpensive labor to its massive market scale is inevitable. So is the relocation of some cost-oriented and laborintensive industries. Nonetheless, the government should help guide the relocation of foreign investment to avoid a huge shock to employment. Better still it should try to woo foreign capital to relocate to China’s central and western regions where they will get more for their money.
In reality, China’s actual use of foreign capital in the first eight months this year has reached $86.5 billion with a mild and steady year-on-year growth of 6.1 percent. Particularly noteworthy is the more inflows of market-seeking capital despite the decrease of cost-saving capital, showing a structural upgrading in China’s attraction and use of foreign capital.
Meanwhile the United States has encountered a massive decline in its capital inflows. According to the US Bureau of Economic Analysis, foreign direct investment in the US has fallen to $51.3 billion in the first quarter, marking a steep drop of 37 percent compared with $89.7 billion in 2017 and a 65 percent decline with $146.5 billion in 2016. US President Donald Trump wished to promote the return of capital to the US, but massive tariff hikes have only served to deter investors from putting their money in the US.
But China still needs to improve its business climate. At the moment China ranks the 78th in the World Bank’s Doing Business 2018 report, although it is expected to rise notably in the rankings over the next two years. To this goal all departments of the government are working strenuously at specific indicators. For instance, the General Administration of Customs has done a lot of work to facilitate trade and improve customs clearance efficiency.
Speaking of US companies in China, besides making huge profits for their home country they have also benefited China considerably by paying tax and helping with employment. So China is unlikely to target US companies in China to get back at Trump’s aggressive trade policy.
China remains attractive for FDI
First of all, profit-driven investors make their decisions mainly based on cost, revenue and market expectations. That a certain part of labor-intensive foreign capital has withdrawn from China and relocated to Southeast Asia does not stand for a massive capital outflow in any sense. The shift of labor-intensive industries is a byproduct of China’s structural upgrading.
Actually a number of companies including BMW and Apple have decided to increase their investment in China recently, demonstrating their confidence in its long-term growth prospects. Compared with other countries, China’s huge market and relatively mature industrial system and chain provide it with lasting and unmatched advantages in attracting foreign capital.
Furthermore China has sent multiple signals that it will con- tinue to deepen reform, particularly those that better serve foreign capital. As the government position paper, The Facts and China’s Position on ChinaUS Trade Friction, made clear, the country is firmly committed to protecting the lawful rights and interests of foreign businesses in China. At the same time, the negative list for foreign investment has been shortened significantly. The market access to industries including services is being expanded gradually. All these are being done to build a more agreeable investment climate for foreign businesses.
Despite their complaints about China, US enterprises and business organizations have expressed their hope that the trade spat between China and US will soon be resolved through discussions. They are willing to further cooperate with China, rather than decoupling from China as some have claimed. On the whole the foundation for China-US cooperation is rather solid.
More reform and opening-up, will stabilize expectations
For multinational companies, the cost of relocating their industrial chains is extremely high as apart from tariff factors there are logistics costs, infradeepen structure, supply chains and supporting industries that all have to be taken into consideration. Which makes a lock-stockand-barrel withdrawal a difficult decision and a rare sight. It rings even truer for multinational companies in China as their production, industrial chains and manufacturing are all completed in China. It is unrealistic to stage a massive withdrawal in a short period of time. Thus the charge that foreign capital has largely pulled out from China is exaggerated, to say the least.
However, if the China-US trade conflict is prolonged it would certainly exert substantial influences on foreign capital’s expectations and decisions, which would chiefly be reflected in the decrease of newly added investment and increase of profits sent home.
The best option for China to respond to the trade dispute is through proactive opening-up of its market and constant improvement of its business climate. China has promised to reform and opening-up with concrete policies and actions, which have already seen satisfactory results. For instance, as a result of China’s decision to loosen restrictions on foreign ownership BMW has decided to expand its investment in China by $3.5 billion and set up the biggest research and development center outside Germany in Shenyang, Liaoning Province.
In fact, foreign companies are willing to continue investing in China as long as the cost is comparatively low and their profits can well cover their costs here. Because as the world’s secondlargest market, Chinese market is quite attractive in investors’ eyes. Moreover, a complete logistics system and advanced labor add to its charms.
Specifically China can further open up the automobile industry, services and financial sector and reduce various sorts of barriers for foreign investment. Meanwhile China can expand international cooperation in high-tech industries with countries and regions including Japan, the Republic of Korea and European Union. China should also lower taxes and expedite the tax system reform, as this would help stabilize foreign investor’s expectations as well as reassure domestic investors.