China economy

Beijing doubles down on luring foreign investors back to China, but will they come?

Offers of easier market access and fairer treatment come in the wake of a second straight drop in annual inbound foreign direct investment

PUBLISHED : Friday, 30 June, 2017, 3:32pm
UPDATED : Friday, 30 June, 2017, 11:24pm

Beijing is redoubling its efforts to lure foreign investors by promising them easier market access and fairer treatment after inbound foreign direct investment fell for a second straight year and the Trump administration launched a plan to lure businesses back to the US with lower tax rates.

In the last two weeks, the Chinese government has shortened the list of sectors that are off-limits to foreign investors to “less than 100 items” in designated free trade zones; the commerce ministry and the economic planner have opened up more sectors to foreign investors; and Premier Li Keqiang promised at the World Economic Forum in Dalian that China will be friendly to foreign businesses by not limiting profit remittance.

Meanwhile, pressure on local government officials to attract long-term capital is also rising. A municipal investment promotion official in China’s eastern province of Jiangsu, a key spot on China’s investment map, told the South China Morning Post that they had to adopt a “beggar thy neighbour” approach in jostling for foreign investment.

“We will visit foreign businesses in Suzhou and ask them to move their factories to our industrial park,” said the official, who declined to be named as he is not authorised to speak to media. “We offer them cheaper land and ready-to-use factory plants.”

At the same time, it’s clear that China is no longer an ideal place for cheap manufacturing, thanks to the country’s rising cost of labour and other inputs.

Beijing cuts list of restrictions on foreign direct investment in free-trade zones

In addition to foreign direct investment inflows falling for the second year in a row in 2016, inflows have continued to fall for the first five months of this year. In fact, many foreign businesses are pulling out of China. In the Pearl River Delta, shoemakers have moved factories to places like Vietnam and Bangladesh, and in Suzhou, the US hard drive maker Seagate decided to shut down its local factory at the end of last year, sacking 2,000 workers.

While Premier Li is trying to convince foreign businesses to stay and put their income back into China for “fatter profits”, China fell behind the United States by US$25.7 billion in investment inflows last year.

China’s struggle for investment inflows intensified after US President Donald Trump took office and was mulling tax cuts for companies. In China, tax incentives offered by local governments, which were common in the 1990s, have become rare as Beijing increases its control over local budgets. “We won’t touch the red line [of giving fiscal incentives]. There are frequent audits of government books,” the Jiangsu official said.

Zhao Yang, chief China economist with Nomura International in Hong Kong, said manufacturing investment in China is no longer an attractive option and it is “quite normal” for foreign investors to relocate their businesses to other countries to chase lower production costs.

Shanghai bears the brunt of anti-globalisation and protectionism with sharp decline in FDI

“Many foreign investors are in China because of low production cost,” Zhao said.

The National Development and Reform Commission said on Wednesday that it hopes to attract more foreign investment in advanced manufacturing, high technology, environmental protection and modern services.

But Cui Lin, an associate professor at the Australian National University, said the knowledge transfer from foreign investors is close to its maximum and China needs to gain core technologies either through domestic development or overseas acquisitions.