Long Guoqiang

Research Report No 080, 2002

For diverse variables including the stages of economic development, competitiveness of enterprises, the situation of international payments, links with regional integration, and foreign policies, different countries adopt policies on encouraging investment abroad with different objectives, ranges and contents. Generally speaking, policies on encouraging investment abroad can be classified as information and technical assistance, financial support and investment insurance, financial support, and governmental cooperation.

I. China’s current policies on encouraging investment abroad and their evaluation

As a country exercising foreign exchange control, China has always carried out strict control over investment in foreign countries. Since the beginning of the 1980s, however, it has gradually loosened control over investment in some special fields in foreign countries in a planned way and worked out some policies on encouraging investment abroad. In the 1980s, there was even a high tide of investment in resource development and trading companies in foreign countries. Because these overseas investment projects turned out to be poor in economic returns from an overall point of view, however, China tightened control of investment abroad once again. After the Asian financial crisis in 1998, China implemented the strategy of encouraging enterprises to engage in foreign businesses of processing and assembly with materials from China, which aimed at increasing exports (processing and assembly with materials from China refers to the practice of international economic and trade cooperation by spurring and increasing export of Chinese equipment, technology, component parts and raw materials through engagement of Chinese enterprises in foreign businesses of processing and assembly, using technology and equipment as major items of investment), and created a comparatively complete system of preferential policies.

1. Information service and technical assistance

(1) Current situation

Information service on overseas investment comes mainly from Chinese embassies in foreign countries, and the information covers mainly the macro economy and market demand in foreign countries, and the basic frameworks of laws and regulations. There are diverse channels for the release of information, such as the media including the International Business Newspaper and the official website of the Chinese Ministry of Foreign Trade and Economic Cooperation.

When it comes to certain specific investment projects, especially those applying for the Central Foreign Trade Development Funds, foreign-aid funds, joint-venture and cooperative projects funds of foreign aid, it is required in the proceedings of application that assessment opinions be provided by the commercial office of the Chinese embassies concerned so as to provide information about the projects in the countries receiving foreign assistance for Chinese enterprises concerned.

The State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation have formulated and promulgated the (First Batch of) Catalogs of Products Encouraged by the State to Be Processed or Assembled abroad with Chinese Materials, and are now working on the Databank of Projects of Processing and Assembly abroad with Chinese Materials and will publish it at the China International E-Commerce Web Station when it has been completed.

In recent years, the Chinese Government has tried to include negotiations on investment in foreign countries in some big international business activities. At the ’98 Xiamen International Trade and Investment Fair held in 2001, for instance, negotiations on Chinese investment abroad were included for the first time. Some countries sent delegations to the fair to hold talks with Chinese enterprises intending to invest in foreign countries.

The Ministry of Foreign Trade and Economic Cooperation and the State Economic and Trade Commission organized six training courses on processing trade abroad in 1999 alone.

Local governments in a few regions have also offered technical assistance. The Fujian Province, for instance, provides a subsidy of RMB 100,000 every year to compensate for costs of front-end studies and clear-up of sites for processing and assembly products abroad with Chinese materials.

(2) Brief comments

Although the Chinese Government has been providing information services on overseas investment for quite a long time, the relevant service still stands at a primary level. There are several reasons. Firstly, the information it collects is fragmental and scrappy because it has not yet created any unified modes for the collection of information. Secondly, the value of quite a lot of information it collects has not been duly brought to use for lack of processing and sorting. Thirdly, there is no any designated institute to take charge of information services. In the United States, for instance, private overseas investment companies are mainly responsible for providing information services on overseas investment, as does the trade promotion council in Japan. When Chinese enterprises plan to make investment in foreign countries, however, they do not know which institute to turn to for information service. Fourthly, there are no authorized or unified channels for the release of information, a situation attributable to the absence of unified institute in charge of information service and management. Fifthly, the level of information service is comparatively low. Some information service already popular in foreign countries, such as organization of delegations to make inspection tours and conclusion of agreements on development of industrial parks with investing hosts, has been conducted by only a very small number of local governments in China, and without much momentum. Lastly, little technical assistance is available for investment abroad.

2. Financial support and investment insurance

(1) Current policies on financial incentives

China provides the following financial support to Chinese enterprises engaging in processing and assembling abroad with Chinese materials:

First, Chinese banks are allowed to raise funds for Chinese enterprises to make investment in foreign countries. In Article 4 of the Opinions of Guidance Concerning Credits for Encouraging Engagement in the Business of Processing and assembling abroad with Chinese Materials, it is stipulated that commercial banks and the import and export banks may lend long, medium and short-term loans to enterprises qualified to take up businesses of processing and assembling abroad with Chinese materials. Long and medium-term loans with a term longer than one year shall be used mainly for purchasing equipment and technology for building factories in the foreign countries concerned and for equipment installation. Short-term loans with a term shorter than one year (including one year) shall be used mainly for purchasing raw materials and component parts from abroad for conduction of businesses and for production and management costs. Such loans shall be mainly in terms of Renminbi. If necessary, short-term foreign exchange loans may be issued. If big sums are involved, the banks can take active efforts to form lending consortiums. In addition, the banks may adopt various ways and methods to support development of processing and assembly business abroad with Chinese materials.

Second, preferential interest rates are offered. It is stipulated in Article 6 of the Opinions of Guidance Concerning Credits for Encouraging Engagement in the Business of Processing and assembling abroad with Chinese Materials that the interest rates for loans to such projects shall be fixed according to those set by the State for loans of the same grade. The interest rates may even be scaled down appropriately within the range set by the State if the borrowers are excellent in creditability and management, or the projects promise visible profits and are sure of repayment of principal and interest. Long and medium-term loans in Renminbi and foreign exchange loans shall enjoy interest subsidy from the Foreign Trade Development Fund offered by central government.

It is stipulated in the Opinions of Encouraging Enterprises to Launch Businesses of Processing and Assembling Abroad with Chinese Materials formulated jointly by the Ministry of Foreign Trade and Economic Cooperation, State Economic and Trade Commission and the Ministry of Finance that enterprises taking up businesses of processing and assembling abroad with Chinese materials may receive preferential loans of a foreign-aid type, which are long and medium-term loans provided by financial institutions designated by the Chinese Government. They have a character of government assistance and donation. The interest margin between the preferential rates and the base rates published by the People’s Bank of China are subsidized by the Central Government with foreign-aid funds.

It is stipulated in Article 5 of the Rules on the Management of Discount Interest for Foreign Exchange Loans Borrowed by Enterprises Engaged in Processing Trade Abroad as Working Capital, jointly promulgated by the Ministry of Foreign Trade and Economic Cooperation, the Ministry of Finance, the State Economic and Trade Commission, the People’s Bank of China, and the State Administration of Foreign Exchange, that the banks lending the approved foreign exchange loans to enterprises engaged in processing trade abroad shall calculate the interests at normal rates, with the Foreign Trade Development Fund providing an annual 2 percentage point interest subsidy for these loans.

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