China economy

China’s factory base cuts business costs, rolls out red carpet to foreign investors as trade war bites

As the trade war hits Guangdong’s export businesses hard, the province cuts business costs, seeks foreign investment to stabilise the local economy

PUBLISHED : Tuesday, 11 September, 2018, 1:02pm
UPDATED : Tuesday, 11 September, 2018, 11:35pm

Guangdong province, the centre of China’s export industry, is redoubling its efforts to shore up domestic manufacturers and woo foreign investors to counterbalance the increasing impact of the trade war with the United States.

The provincial government has updated its foreign direct investment rules to give investors additional incentives to set up plants in the Pearl River Delta, the area just north of Hong Kong that is home to thousands of export businesses, in a desperate move to cushion the economic downturn amid the escalating trade war, economists and industry insiders said.

The government also released a series of moves to cut costs for companies already doing business in the province to help offset the impact of the existing US tariffs on Chinese exports as well as new tariffs that could be announced in the near future.

Guangdong is the first province to roll out a comprehensive set of measures to comply with the Politburo’s direction at the end of July to take steps to stabilise the economy given the downward pressures on growth from the trade war as well as the government’s campaign to reduce risky shadow bank lending.

According to the new foreign investment rules published on Friday, for the first time Guangdong will allow foreign investors to set up wholly owned ventures to manufacture new-energy vehicles, aircraft, drones and other high-end products. Until now, foreign firms wishing to operate in these sectors in the province were required to have a local joint venture partner.

The government has also promised to provide free land for any project with an investment of more than 2 billion yuan (US$291 million).

In addition, the Guangdong government on Monday published a series of initiatives that cut corporate taxes in the province as well as reduce costs for land use, electricity, transport, financing and payments for employees’ social security. The local authorities estimate the moves would reduce costs for businesses in the region by over 200 billion yuan between 2018 and 2020.

The new regulation comes amid growing signs that the trade war is hitting the province’s export industry hard. Guangdong’s manufacturing sector contracted in August for the first time in 29 months, according to the purchasing managers’ index released last week.

Trump doesn’t fully understand how global trade works, ex-negotiators say

More importantly, the longer the trade war between the world’s two biggest economies continues, the greater the incentive for companies now operating in Guangdong to relocate their factories to other places, such as Southeast Asia and Africa.

But the new regulations may be too little, too late for many foreign investors.

A government official in Guangdong said the new rules allowing full foreign ownership of a new energy vehicle plant, for instance, came after Tesla decided to pick Shanghai as the location for its China plant.

“Guangdong had for a time tried to attract Tesla but it could not give Tesla full ownership because there was no such policy,” the official said. Tesla’s plant in Shanghai has a structure of exclusive ownership as Shanghai, with consent from Beijing, went the extra mile to seal the deal when the trade war flared up.

In a sign of Beijing’s support for the landmark project, Chinese Vice-President Wang Qishan held a meeting with Tesla chief Elon Musk in the capital.

From a national perspective, foreign direct investment flows into China have been slow. Official figures showed the country attracted US$76 billion worth of foreign investments in the first seven months of this year, an increase of 5.5 per cent.

But Guangdong has seen a fall in foreign investment in the first half of this year, down to 79 billion yuan (US$11.5 billion) compared to US$12.3 billion for the same period last year, according to the provincial government data. The full impact of the trade war, which began in early June, is not yet reflected in the data.

Opinion: Why Beijing will sacrifice its middle class in trade war with Trump

Meanwhile, Guangdong’s new investment regulations still lack practical steps that would support and protect foreign companies, such as correcting the lack of access to China’s domestic markets and preventing the forced transfer and theft of core technology, according to a senior executive of a European company, who asked not to be identified.

“In any case, we are concerned the mainland market will shrink in future due to the economic downturn. We have no plans to expand investment in the mainland, the same as many foreign companies in the Pearl River Delta, according to what I understand,” he said.

In the face of mounting difficulties, Guangdong initiatives to attract international investors are being matched by the government in Beijing, which is making a big effort to show the rest of the world that China is open for business.

Premier Li Keqiang on Friday met the visiting chief executive of ExxonMobil and gave his blessing to the US energy giant’s plan to build a US$10 billion petrochemical complex in Huizhou, a city in southeast Guangdong.

‘US can’t hold on for long’ in trade war say ex-Beijing officials

That meeting came just weeks after Beijing granted German chemical giant BASF permission to build a plant in Zhanjiang, another Guangdong city, with a total investment of US$10 billion. China’s approval of the project, one of the first in which a foreign investor has full ownership without a local partner, was unusually fast.

According to Zhanjiang Daily, the city’s mayor, Jiang Jianjun, only visited BASF’s head office in Ludwigshafen in April to promote the advantages of the site for the new plant.

A source close to the Guangdong government, who declined to be named as he was not authorised to speak to the media, said the province was also lobbying big-name international internet service giants and European hi-tech firms to set up operations in the province.

The attraction of China as a good place for global businesses to set up shop is being put to the test by the trade war. Guangdong, in particular, faces major challenges to attract and retain businesses as its labour, land and utility costs are higher than in other emerging markets.

Lin Jiang, an economist at Sun Yat-sen University’s Lingnan College, a think tank that provides advice to the government, said the province’s economy was under huge downward pressure and its future was highly uncertain given the trade war, so new foreign investment was crucial to keep growth on track.

Big foreign investment projects were particularly welcome as they showed China’s openness and helped Beijing to compete with the US in the global public relations war over trade issues, he said.

This made it vital for the government to do all it could to support such projects, he said.

“Generous incentives in financing support, environment assessment and land use” were on the cards for such projects, he said.