China opens up to aid growth

Beijing wants to encourage foreign direct investment, which has been falling over recent years. To do so, its premier has announced measures designed to ease the process for investors and cut industrial overcapacity.

China wants private and foreign businesses to take up some of the responsibilities currently handled by state-owned companies. Zhang Peng / Getty Images
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Beijing // In the face of a slowing economy, China has launched a crackdown on dual fronts.

It is cutting down industrial overcapacity, which has clogged up the economy and resulted in complaints about the dumping of goods by Chinese producers in foreign markets. It is also pushing provincial and municipal officials to remove hurdles in the way of foreign investors, who will now get a wider – and more level – playing field.

These are among the moves announced by the premier Li Keqiang to the national people’s congress, or the Chinese parliament, this week. Mr Li’s actions also represent a reality check in the world’s second-biggest economy, which is witnessing strong signs of slowdown and a decrease in the flow of foreign direct investments (FDI).

“Foreign firms will be treated the same as domestic firms when it comes to license applications, standard setting and government procurement,” Mr Li said while presenting the government’s annual work report, which is equivalent to budgetary proposals elsewhere.

His comments came after government statisticians reported that FDI had fallen by a steep 9.2 per cent in January after clocking a growth of 3.8 per cent in November and 4.1 per cent in December last year.

Analysts are debating whether this is a monthly aberration, which will be corrected in the coming months, or signs of a speed up in a general trend.

“The growth of FDI inflows to China has been slowing down in the past few years. I think China’s leaders realise that it is important to continue to attract foreign companies to invest in China, not only for their money but more importantly, for more advanced management skills and technical knowledge,” Wang Cong, a professor of finance at the China Europe International Business School, tells The National.


At a glance:

■ What: The Chinese president wants to bring in reforms that will create a level playing field for foreign investors.

■ Why: A slowing economy and falling FDI, coupled with potential trade risks from abroad, has increased concern in Beijing.


FDI inflows slid sharply, by 13 per cent, for 2016, prompting some analysts to warn that the coming months will see much lower investment flows as compared with the past, partly because of threats from the Trump administration in the United States.

“The drop in FDI seen in China recently may well be in response to Trump’s threats to build barriers,” says Kaushik Basu, a professor at Cornell University and former chief economist of the World Bank. “But there are other factors too. There has been a bunched up profit repatriation from China by China’s foreign investors in recent times, which contributed to the decline in net FDI”.

Chinese officials have argued that slowing FDI over February is not indicative of a trend. “We never use one month’s figure to summarise a long-term trend, and an early spring festival last month was another factor to affect the country’s monthly FDI volume,” Gao Hucheng, a former commerce minister, said before Beijing suddenly replaced him late last month soon after the dip in FDI numbers was reported.

“The FDI in any country will come and go with the development of the economy and changing industrial structure.”

Mr Li candidly acknowledged the challenges to the Chinese economy as he opted for the lowest economic growth target in 25 years, pegging it at 6.5 per cent of GDP for 2017.

But it is not only a fear of further slowdown that is motivating the government’s policy moves. A closer look reveals an interesting strategy, with the government urging private and foreign businesses to take up some of the responsibilities that are now handled by vast and sluggish state-owned companies.

The government wants foreign firms to raise funds in the Chinese market by listing in local stock markets and issuing bonds to Chinese investors.

“We will encourage foreign invested firms to be listed [in local stock exchanges] and issue bonds in China,” Mr Li said, unveiling new efforts to woo foreign investment.

Mr Wang said: “Allowing foreign companies to issue stocks and bonds in China will broaden the pool of financial products that Chinese investors can hold and provide them access to securities issued by high-quality foreign companies.” He added: “It is an important step in the process of the internationalisation of the RMB [renminbi or yuan] because foreign companies will be able to raise proceeds in RMB when they issue stocks or bonds in China, and inevitably they will use the RMB raised to invest either in China or in international markets.”

The premier also announced measures to reduce overcapacity in the property market, and in the steel and coal sectors, which impose a heavy burden on the overall economy. High inventories of millions of unsold houses has resulted in a huge debt problem for banks and provincial governments.

Steel production is set to be reduced by an additional 50 million tonnes in 2017 after local manufacturers were forced to accept a production cut of 65 million tonnes last year, Mr Li said. The government is also asking coal mines to reduce production by an additional 150 million tonnes this year over and above the cut of 290 million tonnes effected in 2016.

This is partly in response to an uproar in Europe about what Europeans see as steel dumping by Chinese companies, who are offering cut-throat prices because overcapacity has left them with huge unsold inventories. European governments have also alleged that China’s state-owned companies are taking advantage of government subsidies to beat down international prices at the cost of local producers.

China is faced with some serious external challenges. There is a move in the European Union to introduce rules to counter China’s steel dumping. The US president Donald Trump wants to impose heavy duties on Chinese goods and closely scrutinise investment proposals from China.

The work report showed Mr Li is also responding to western criticism about limited market access for foreign investors and steel dumping.

As a sweetener for private and foreign investors, he announced a higher tax rebate of 75 per cent on investments in research and development.

At present, companies get a 50 per cent rebate on what they spend on R&D. In addition, a number of operating fees and utility charges will be reduced to give relief to businesses. Corporate taxes on small businesses have already been halved.

There are other signs of investment slowdown in China. The American Chamber of Commerce in China (AmCham) said that 25 per cent of US companies in China have moved their operations to other countries or are planning to do so.

“About one-third of [AmCham member] companies say they do not plan to increase investment in 2017,” it said while releasing the results of a recent business climate survey. About 39 per cent of the companies surveyed said they would increase their investments by less than 10 per cent.

“I think as Chinese growth slows and financial risks increase, combined with a more discriminatory treatment of foreign investors in China, many foreign investors will rightly ask if their investments in China continue to be justified by the ‘ooh, it’s a billion people so we gotta be there’ factor,” Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics, tells The National.

“In the long run, if foreign businesses don’t make much money in China they will stop coming”.

As world growth remains sluggish and deglobalisation and national economic protectionism are gathering pace, Mr Li is only too aware of the challenges ahead.

“The developments both inside and outside of China require that we are ready to face more complicated and graver situations.”

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