China will modify import tariffs on production machinery for foreign-funded processing and assembly projects in a bid to halt investment drainage. Guangzhou Municipal Commission of Foreign Economic Relations and Trade director Tan Kecheng said the policy was approved recently by the General Administration of Customs and the Ministry of Foreign Trade and Economic Co-operation. Under the new measures, approved foreign-funded processing and assembly projects will not pay import tariffs on production machinery this year, and will start paying in installments only over the next five years. The preferential policy will apply only to machinery not classified as an 'investment'. Mr Tan said Guangdong would introduce the preferential policy but he was not sure if it would become a national policy. 'It is an important measure for Guangzhou and Guangdong, because the processing and assembling business is a pillar sector to the region's economic development,' he said. At the end of 1996, a total of 8,423 processing and assembly factories were registered in Guangzhou - 598 more than in 1995. Growth has slowed since China cancelled duty exemptions for foreign investors who applied for capital goods imports after April 1, 1996. Mr Tan said the latest preferential treatment was aimed at maintaining Guangdong's status as a processing base for foreign investors. The Guangdong provincial government approved a number of incentives for foreign investors during its foreign trade and economic co-operation conference, which ended on Monday. Guangzhou executive vice-mayor Chen Kaizhi said these included regional-tax rebates, such as business tax and value-added-tax. Foreign-invested hi-tech projects or enterprises would also be given 'compensation' by local governments to make up for extra expenses for import tariffs. 'The regional government may offer tax rebates, fee cuts or lower land charges but all of this will be allocated through regional revenue,' Mr Chen said. 'It will even pay import tariffs for new and advanced machinery used to upgrade our state-owned enterprises.' Mr Chen said incentives were a key factor in attracting foreign investment, which had slowed last year since the cancellation of tariff exemptions. Last year, Guangzhou recorded a 15.4 per cent rise in total foreign contractual investment to US$2.6 billion, in which actual investment grew 8.7 per cent to $2.33 billion. In the first quarter, 698 foreign-funded projects were approved in Guangzhou worth a total of $1.18 billion, with actual foreign investment of $540 million, up 7.1 per cent from a year ago.