Foreign investment crucial for China

By: | at 07:00 PM | International Trade  

Foreign investment is crucial for China to push ahead with market-oriented reforms and job creation, a senior economist with the Commerce Ministry said, weighing into a sharp debate over the pace of reform.

Li Yushi, vice president of the Chinese Academy of International Trade and Economic Cooperation, the ministry’s think-tank, shrugged off suggestions that foreign multinationals had monopolized many domestic industries or were poised to do so.

Growing trade strains with the West and concerns of foreign influence have sparked a debate among Chinese academics and officials about the pros and cons of Beijing’s 27-year-old policy of opening its economy to foreign investment.

“The debate is heated, but my view is very clear: that foreign investment brings more benefit than harm,” Li said.

“I think the biggest contribution of foreign investment to China is that it brings in the concept of the market economy.”

China needed to rely on the booming export sector to create more jobs, given Beijing’s uphill battle to absorb millions of laid-off urban workers and peasants each year, he said.

A crucial factor in China’s transformation into a global export powerhouse has been foreign direct investment: typically, foreign capital poured directly into establishing factories or other businesses, often in partnership with Chinese investors.

Firms with at least some foreign ownership account for almost 60% of the country’s exports.

Li Deshui, head of the National Bureau of Statistics, said that foreigners had gained a strong foothold in some sectors of China’s economy and that Beijing must act now to prevent more domestic firms from falling prey to multinationals.

China needed legislation to curb “ill-willed” acquisitions of domestic companies by foreign firms and to scrap the country’s decades-old preferential policies for foreign investors, notably tax breaks, Li said.

Echoing recent concerns over China’s sale of stakes in its major banks to foreign investors, Li also said that unchecked acquisitions by foreign multinationals could pose a threat to China’s economic security.

“Economic security”

The bulk of economists argue that the pace of China’s opening up and reform policies should continue unchecked, while top leaders have pledged to attract more foreign investment, albeit putting more stress on the quality of capital inflows.

Premier Wen Jiabao told parliament that the country needed to “pay particular attention to safeguarding China’s economic security” while opening wider to the outside world.

The Commerce Ministry’s Li said foreign companies were far from monopolizing industries such as automotives and beverages.

“Look at the domestic car market. It appears that foreign makers enjoy a monopoly, but in fact it’s not any single car maker that dominates the market,” he said.

He said the law to equalize tax for local and foreign companies was unlikely to be implemented this year and tax breaks would continue for some industries after the taxes were unified.

Many firms with foreign ownership in China enjoy preferential income tax rates set by local governments as low as 15%, while domestic firms are typically taxed at 33%.

China has been drafting a controversial anti-monopoly law for more than a decade. Parliament said in December it would consider the legislation this year.

China’s accession to the World Trade Organization in late 2001 cemented its role as the workshop of the world, and foreign direct investment has since poured in at the rate of $1 billion a week to take advantage of its cheap, industrious labor.

In 2005 China drew $60.3 billion in actual foreign direct investment, just shy of the 2004 record of $60.6 billion.


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