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Seven Obstructive Attitudes in the Introduction of Foreign Investment


The introduction of foreign investment in China has gone through three periods since the 1970's.

The First Period: 1979-1991
Borrowing overseas was the main method of introducing foreign investment, and the proportion of this sector reached 80% of total investment.

The Second Period: 1992-1998
The foreign invested volume exceeded the borrowing volume overseas, becoming the main means for the introduction of foreign investment.

The Third Period: 1999 Till Now
In 1998, the introduction of foreign investment slowed down, and the situation worsened in 1999. Though the volume amounted to U.S.$ 40.3 billion, there was still a 11.3% decrease compared with the previous year.

According to a comprehensive survey and analysis of the international and domestic environment, the introduction of foreign investment by means of transnational purchase will be the main task for the next period. With the international climate of transnational purchase and further reforms of SOEs, the introduction of foreign investment will assume a new look, i.e. transnational purchase.
However, seven attitudes are blocking the introduction of foreign investment.

1. Preferring Quantity to Quality
This is remarkable in the industrial and regional structure of the foreign investment. In recent years, changes have taken place in the industrial structure, i.e. preferring industry to agriculture; preferring the general processing industry of small scale, quick rewards and low risks for the fine processing industry; preferring labor intensive industry to the capital and technology intensive industry. This situation not only fails to meet the requirements set under industrial policies, but also worsens the supply and demand for infrastructure facilities. Of all foreign invested industries in 1998, 73.03% were generated by industry, put together agriculture, forestry, animal husbandry and fishery, only accounted for 2.7%, transport and communication services for 1.08%, and the scientific research and technology sector was only 0.72%. Moreover, the industry focused on the general processing industry and the labor intensive industry. In regional distribution, the foreign investment was distributed mainly in eastern regions.

2. Preferring Direct Investment to Transnational Purchase
It's easy to note that the direct foreign investment is out of favor, while transnational purchase is becoming the main means of transnational investment.

3. Preferring Accumulation to Purchase
any domestic enterprises insist on expanding production through accumulation by themselves and ignore the lever effect of the purchase. One of the advantages of the purchase is to realize rapid expansion through the integration of limited resources and the flexible use of stock capital.

4. Preferring Favorable Policies to National Treatment
Most scholars consider that China's policy in the introduction of foreign investment since the reform and opening is typical of a developing country in absorbing foreign investment. Examples are the favorable policies of "ultra national treatment" for foreign investment and the "sub national treatment" in other sectors. Provided clearly in the "Law for Chinese-foreign Joint Ventures" and the regulations of the State Council are that foreign-invested enterprises enjoy favorable policies in taxation, operation, import and export rights and income and expenditure of foreign exchange, as well as many "sub-national treatments", for instance, setting the proportion requirements of home-made products and exports in the strict and complicated approval procedure.

The negative effect of the "ultra national treatment" should not be ignored. Prompted by the favorable treatment, many domestic enterprises rushed to cooperate with foreign businessmen, but their foreign partners do not invest at all or dawdle in the investment, or take back their money soon after the establishment. Therefore many phony joint ventures emerged.

Another disastrous effect of the "ultra national treatment" is the competition between regions and governments in providing favorable treatment. In order to absorb foreign investment, numerous measures are implemented, such as the reduction or remission of taxes, favorable loans, the batch-leasing of land, and the lowering of environmental protection requirements. All this severely impedes tax sources and destroys state-owned resources.

5. Preferring Stock to Augment of State-owned Assets
Some are afraid that transnational purchase will cause the flow of state-owned assets, then how to view the book value of state-owned assets, i.e. how to regard the connection of the stock and the added value. According to current regulations, the pricing of state-owned assets should be approved by the appraisal agent authorized by the government and submitted to the government for confirmation. Ignoring the operational situation of enterprises, current appraisal methods fail to conduct an actual description and over value state-owned assets, so many foreign investors do not accept or purchase our enterprises. Once other methods are adopted, some will think the state-owned assets will flow outward. So we can conclude that the stock of state-owned assets only has the book value and the added value has never occurred.

6. Preferring the National to the Global
Some think that the transnational purchase is destroying the national industry, but a survey has indicated that people in industrial circles adopt a positive attitude towards the transnational purchase and share holding. However, it doesn't mean that stressing the solution of problems through transnational purchase is a magic drug that will heal all the illnesses of China's enterprises.

7. Current Domestic Deposits are Abundant and the Foreign Exchange Reserves are Rich, so there is no Need to Absorb Foreign Investment
This is the accepted thinking among quite a number of people. They do not understand that a great deal of citizens' deposits exist in the form of unhealthy loans by state-owned commercial banks or the latent losses of enterprises. Statistics show that the unhealthy loans by four large commercial banks amount to some RMB 1500 billion. Besides, China's foreign exchange reserves conform to our national condition, and to keep a certain amount of foreign exchange is absolutely necessary. The introduction of foreign investment will cover the capital shortfall, and more importantly, it will encourage advanced administrative methods and promote the upgrading of technology. In this matter, covering the capital shortfall must not be taken as the only purpose of the foreign investment, or otherwise narrow-mindedness is inevitable.


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