Foreign ventures lose allure
It has not been a good year for two of Beijing's best-known foreign ventures. Beijing Jeep, 50 per cent owned by Chrysler Corp, will sell 50,000 vehicles, down from 70,000 last year, and sees profits falling to less than 100 million yuan (about HK$92.9 million) from 250 million yuan and 350 million yuan in the past two years.
Matsushita Colour Television Tube, 50 per cent owned by the Japanese giant and with investment of three billion yuan, also says profits will fall.
'There is excess production of certain types of tubes, fierce competition and price-cutting to an unreasonable level,' an official said. 'There is no control of new production capacity. It is a vicious cycle.' Over-capacity is one reason why foreign investment in China is declining for the first time in 20 years. In addition, slowing economic growth, inadequate laws and regulatory protection and lack of access to the market are causing foreign firms to reconsider.
While China remains an important long-term market, does the investment have to be made now? Why not wait and see if the leadership can deliver on its pledge to keep economic growth at 7 per cent a year and improve the investment environment? These doubts have been compounded by the fall in currencies of Asian countries, making their exports more competitive, their assets cheaper and reducing the ability of their companies to invest abroad.
In the first 10 months, contracted foreign investment in the mainland was almost US$40 billion, down 35 per cent on the corresponding period last year and the first such fall since Beijing started its open-door policy in 1979.
'Foreign companies made major commitments to China over the past four years on assumptions of continuing liberalisation of the investment climate and a market of 1.2 billion consumers,' the representative of a US telecommunications firm said. 'Now there is a perception that the process of liberalisation, of reducing bureaucratic procedures, taxes and obstacles to doing business has come to a halt.
'There is a question about China's real commitment to a market economy,' he said.
He said there was a policy battle within leadership between those who wanted a market economy and those who wanted a South Korean-style system dominated by big state corporations.
'We are not treated as equal partners,' the representative of a European manufacturer said. 'Chinese . . . must allow [foreigners] to share in the success of joint ventures.
'International companies have invested heavily in China. Now they are taking a wait-and-see attitude, to see if they can generate enough profit. The legal environment is not safe enough,' he said.
'[Next year] will be a crucial year, with a further slowdown in growth, reduced export volume, tremendous downward pressure on the yuan and the long-standing problems of state firms and the banks. I do not see the money and brain power needed to solve these problems,' he said.
In the first nine months of the year, post-tax profits of foreign-invested joint ventures in Beijing stood at 409 million yuan, down 31 per cent from a year earlier.
Foreign-invested firms have become part of the economy's lifeblood. Last year, they accounted for 14.9 per cent of China's fixed asset investment, 18 per cent of industrial output and 14 per cent of exports - and employed 17.5 million, equal to 8.8 per cent of the urban workforce.
From 1992 to 1996, China attracted the most foreign investment of any developing country. As of the end of September, it had approved 300,000 foreign investment projects, with contracted investment of $500 billion and actual investment of $210 billion.
Minister of State Planning Chen Jinhua told a seminar in The Hague last week that in the next 10 years China would need $800 billion to build power stations, telephone exchanges and other infrastructure.
Policy-makers in Beijing are to meet this month to discuss ways to halt the investment slowdown and decide new measures to attract investment, to be announced early next year.
Mr Chen outlined the measures at The Hague seminar. They include duty-free import of capital equipment, exemption from VAT for investments in the technology sector, and 50 per cent VAT and duty for importing capital equipment in sectors designated as priority by Beijing.
Fields open to foreign investment will be liberalised and legal protection improved, with new regulations governing build, operate and transfer projects and better access in mining, sales distribution and telecommunications, Mr Chen said.
Foreign firms waiting for liberalisation of the telecoms market need to be convinced of a change of heart.
'The government has shown no serious determination to deal with the fundamental problem of separating the regulatory and operational functions of the Ministry of Post and Telecommunications and establishing a legal and regulatory framework to provide a level playing field for competition,' the US official said.
'The listing of China Telecom makes liberalisation even less likely.' Firms from Japan and South Korea, two of the biggest investors in China, are nonetheless bullish on the mainland market.
'So far, the problems in the Japanese economy have not affected investment in China,' an official of the Japan External Trade Organisation said.
A Korean Chamber of Commerce official in Beijing said the IMF-ordered restructuring of South Korea's economy would have an impact on the ability of its firms to invest in China.
'Their main complaint is the 8.5 per cent VAT to be imposed on exports,' he said.
'Many firms have not received the return on investment they expected,' he said. 'But they remain interested.'