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Foreign Investment in China in Major Retreat
Lu Qingshuang
1/16/2005



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For more than a decade, China’s overheated economy has lured huge sums of foreign capital. According to official data, funds flowing into China are rising every year, and foreign media reported that the China fever had run so high that profit outlooks tended to be overlooked. But recent reports from both Chinese media and western research institutes seem to have slowly but surely cooled that fever.

Some experts, while finding other countries more lucrative, concluded that funds placed in China take a higher risk and promise less return. One media outlet in China let out the word recently that nearly half of foreign funds have already been withdrawn and the once booming automobile industry is now on the verge of operating at a loss.

In its report entitled “The China Fever Has Reached the Point of Disregarding Profit Outlooks” on Dec. 27, Deutshe Welle said that analysts from Deutsch Bank observed that many companies have begun to question the risk/return ratio of investing in China. A survey of enterprises operating in China indicates that almost no German companies are willing to disclose information about their revenues in China and companies from other countries, too, try to shy away from the subject of their profits, said the bank.

China Economic Quarterly, an independent publication, found that the revenues of the U.S. companies in China for 2003 totaled $4.4 billion. For the same period, that figure stands, respectively, at $7.1 billion in Australia, a country with a population of 19 million, $8.9 billion in Taiwan and South Korea combined, and $14.3 billion in Mexico.

An article entitled “The Local Governments Need Foreign Funds - Suspension of Integration of Income Tax Systems for the Chinese and Foreign Enterprises” published Dec. 18 by the state-run Finance and Economics Daily, revealed for the first time that nearly half of foreign funds have been pulled out of China. That article came as the U.S. House of Representatives Taxation Committee had just passed the Homeland Investment Act, cutting the tax rate for overseas U.S. companies from 35 percent to 5.25 percent for one year, provided that earnings from such investments be invested in the United States. In response to the Homeland Investment Act, Beijing decided to suspend the tax integration process that had been publicized for nearly two years. The tax integration means that foreign-funded companies no longer enjoy preferential tax treatment and should pay the same tax rate the Chinese companies do.

During an interview with Finance and Economics Daily, an official from China’s Commerce Ministry disputed the statement that foreign funds are excessive in China. In the view of the official, foreign funds in China are clearly not excessive because the cumulative amounts of foreign funds used in China totaled $559 billion, and nearly half of those amounts have been withdrawn. Foreign-funded businesses registered in China currently stand at 504,568, but fewer than two-thirds are in operation, the official said.

A week before the report by Finance and Economics Daily, Huang Hai, assistant to the minister of China’s Commerce Ministry, confirmed what the official had said. According to Huang, the stock of foreign investments in China has by far been overestimated. Since there are no statistics on the stock of foreign investments in China, the concept of “cumulative amount of foreign funds actually used in China” has been widely in use, said Huang. That number, however, does not indicate how many foreign ventures have ended their operations or withdrawn their funds. By the end of last year, the stock of foreign funds in China stood at about $250 billion, or half the cumulative amounts of foreign funds actually used for the same period, which amounts to $501.4 billion.

Meanwhile, the ratio of foreign funds to China’s fixed capital investment is also a case in point. According to statistics from China’s Commerce Ministry, China actually used $53.5 billion in foreign funds in 2003, or 8.03 percent of that year’s total investment in fixed capital. Yet the corresponding figure for 1994 was 17.08 percent.

Additionally, investment in China involves high risks and low returns. In the first half of 2004, for instance, many world-class automobile companies, upbeat about China’s economic future and expecting a boom in China’s auto industry, scrambled to sign agreements with China for investment and expansion.

In her interview with The Epoch Times in early 2004, economist He Qinglian noted with concern that the bubble economy in China would not last long and would burst soon. With those words still ringing in the ear, Xinhua Net reported on Dec. 18, “China’s auto industry, with growth in production but not in revenue, is already on the verge of operating at a loss.”

That report was based on a Workers Daily interview of Jiang Yuan, a specialist from the mass transit division of the national statistics bureau. While the output of China’s auto industry keeps rising, its revenue remains stagnant, Jiang said. The profits of the whole industry continued to drop in November and the industry is facing the risk of losing money, he told Workers Daily.

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