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China still a magnet for foreign investment

by Zhi Shan ( China Daily )
Updated: 2008-02-28 09:41

After several years of mild growth, the country received $74.7 billion in foreign direct investment in the non-financial sectors last year, ahead of all developing countries for the 15th successive year.

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That figure reflects a year-on-year increase of 13.59 percent, the Ministry of Commerce said in January.

Total foreign direct investment (FDI) - including capital flows to the financial sectors such as banking, insurance and securities - hit $82.7 billion in 2007, up 13.8 percent from a year earlier.

"The growth is higher than my expectations," said Wang Zhile, director of the Multinational Enterprise Research Center affiliated to the Ministry of Commerce. "It shows China's role as a crucial link for multinationals' global manufacturing, purchasing and research."

But there could be some adverse influences on foreign investment in China this year.

Income tax rates for domestic and foreign companies were unified at 25 percent from the beginning of 2008.

Before this, domestic companies paid a 33 percent income tax while foreign companies, which benefited from tax waivers and incentives, paid an average of 15 percent.

However, foreign companies registered before the new rates took effect will pay tax at the preferential rate for another five years.

Foreign investors are also paying more for labor and material costs, such as oil, plastics and steel, and face tighter policies on polluting and resource-intensive industries.

But experts believe China will continue to be a magnet for FDI as Beijing's policies to woo foreign investors and open up continue.

"The Chinese leadership assured foreign investors at the 17th Party congress late last year that China will stick to its reform and opening-up policies," Wang said. "It is taken as a good opportunity by many foreign investors."

FDI in non-financial sectors is expected to increase 4 to 6 percent year-on-year in 2008 to hit $69 to $72 billion, according to a report released by the center of forecasting science under the Chinese Academy of Sciences.

The report said FDI in the service sectors, including banking, insurance and retail, is expected to accelerate this year as China opens these sectors to foreign investors.

Meanwhile, Beijing also expects foreign investment, which has been one of the driving forces of Chinese economic growth, to increase in tandem with the country's industrial policies.

Foreign investors are expected to pour more funds into China's service sectors, such as service outsourcing, as China tries to bring the industry in line with manufacturing, Commerce Minister Chen Deming said at the national commerce working conference in Beijing.

He said China will open the finance, insurance and telecommunications sectors further to encourage foreign-backed companies in these areas.

The minister said the nation's commerce departments will focus on how to improve the quality of FDI this year rather than just increasing the FDI total.

"We will further encourage foreign investors to move into the hi-tech, energy-saving and environment-protection industries as well as high-end manufacturing," he said.

Chen said the government will encourage foreign-backed research and development centers in hi-tech sectors like telecommunications, new materials and bio-technology.