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Has China's investment environment "deteriorated?"

By Yang Changyong ( Peopledaily.com.cn)
Updated: 2010-04-28 09:49

Some western media agencies recently advocated the theory that China's investment environment has deteriorated. They believe that China's discrimination toward foreign investments is rising, its regulation environment is worsening and foreign enterprises are facing terrible difficulties in their operations. However, facts and data have proved that instead of deteriorating, China's investment environment has been continually improving.

According to a report issued on Jan. 19 by the United Nations Conference on Trade and Development (UNCTAD), the foreign direct investments (FDI) around the world tumbled by nearly 39 percent in 2009. Of which, FDI was down over 41 percent in developed countries and about 35 percent in developing countries. Of the developed countries, FDI dropped by more than 29 percent in the European Union, 57 percent in the United States and more than 53 percent in Japan. Of the developing countries, FDI was down by nearly 50 percent in Brazil, more than 41 percent in Russia and 19 percent in India.

It was a sharp contrast to China where foreign investment had the best performance. In 2009, FDI in China dropped only less than 3 percent. Since August 2009, foreign investments in China have maintained a continued, positive growth. It can be said that foreign investments have been flowing into China despite the global trend. This fully indicates that China's overall investment environment has been recognized by foreign enterprises.

According to data recently issued by the American Chamber of Commerce in China (AmCham-China), 71 percent of US-funded enterprises in China generated profits in 2009. Around 76 percent of them have had higher profit margins than their average global profits and 91 percent are confident that their China operations will return to the 2007 level in the next five years. Over 75 percent of them view China as one of their top three global investment destinations in 2010 and nearly 80 percent plan to expand their investments in China in 2010.

Over recent years, the costs for China's production factors such as labor, resources, land and environment have entered an upward trend. In light of the situation, the most essential reasons behind the relatively high profitability and the investment confidence foreign enterprises have in China lie in the fact that China's overall investment environment has been more attractive because of constant improvements in China's investment environment and the lowered transaction costs for foreign investments.

The State Council clearly stated in the "Several Opinions on Better Utilization of Foreign Investments" issued on April 6 that China will expand the areas that are opened to foreign investments, optimize the industry and regional foreign investment structure and enhance the investment and management efficiency in order to foster a sound investment environment. This should not only be viewed as the clearest signal for the further improvement of China's investment environment, but it is also the most powerful response to the theory that China’s investment environment is deteriorating.

However, two points should be made clear in terms of the improvement of China's investment environment.

First, it takes time to improve the investment environment, particularly the soft environment that is related to systems and regulations. Local governments cannot implement regulations and laws adopted by the Central Government in one move. It is inevitable that some unsatisfactory problems will take place in the process. Since China began market reforms, it has always sincerely welcomed foreign investments, amended the "Catalogue for the Guidance of Foreign Investment Industries" five times and continually raised the level of opening up to foreign countries. It should be believed that the macro direction and trend for the improvement of China's investment environment will not change, and the investment environment will surely improve step-by-step.

Second, improving China's investment environment needs not only the sincerity China shows to foreign enterprises, but also needs foreign organizations, including foreign enterprises and media agencies, to understand and respect China. Respecting China's laws, customs and culture is the most basic business ethic for foreign enterprises.

Meanwhile, when foreign enterprises meet difficulties in investments, they should negotiate with relevant Chinese sides through rational channels in order to address the problems. If foreign enterprises just complain and foreign media agencies exaggerate complaints without any analysis and badmouth China's economy, they will instead postpone the process of improving China's investment environment and eventually hurt the interests of foreign enterprises in China.

The author is an assistant researcher at the Institute for International Economic Research under the National Development and Reform Commission.