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David Friesen

There was initial alarm in some quarters at China’s recent FDI drop, with a number of commentators suggesting that it showed the reduction in appeal of China’s market for investment, amid concerns over an economic slowdown and investigations into a number of foreign firms.
FDI fell at its sharpest rate since the financial crisis, down to US$7.2 billion in August 2014 – the lowest monthly total since July 2010. This was 14 per cent lower than the same month in 2013.
There are a number of reasons why such a drop has occurred. Firstly, there are concerns over a potential property bubble burst in China as the economy slows down, forcing China again to lower interest rates.
Another reason is the multiple probes from Beijing into foreign companies regarding anti-monopoly laws, ranging across sectors from automobiles and pharmaceuticals to food products.
However, such concerns have been quickly denied by the government. "It is only normal that there is volatility of FDI in individual months when China steps up efforts to balance the economic structure…It is not sufficient enough to reflect the general trend. It must not be linked to the anti-monopoly probes into some foreign invested companies or be associated with other baseless speculations," Commerce Ministry spokesman Shen Danyang recently told reporters.
Another reason for the overall drop is perhaps down to one specific reduction in FDI. Investment from Japan into China has dropped markedly as diplomatic relations have soured over island disputes and historical issues, with the total falling 43.3 per cent in the first eight months of 2014.
Although overall FDI has also fallen from the US and Europe, this is in part due to a change in China’s needs regarding FDI as it looks to reshape its economy and move even further away from heavy manufacturing.
Services and high-tech industries are now crucial to China’s development, and this is where it is looking for further targeted FDI. According to the World Bank, the services sector has nearly doubled its share of the Chinese economy since 1980, but still commands less of a share than it does in developed economies. And as internal consumption continues to rise, this targeted FDI is needed more than continued growth in areas where China is already capital-rich.
What this means is that countries with strong expertise in these sectors have actually shown a rise in their investment into China. Both South Korea and the UK were on an upward curve of FDI in the first 10 months of 2014 – South Korea jumped 26.4 per cent while investment from the UK rose 32.4 per cent.
It seems that the FDI drop is just a sign of China’s desire to move its economy up the value chain.
"Data has shown China's economy is weakening because of industrial restructuring but Korean companies consider China's internal demand to be big and thus are optimistic about the outlook," said Hwang You-sun, deputy general manager at Korea Trade Investment Promotion Agency (Kotra) in Shanghai, in a recent interview with Reuters.
Ingrid Ge, Economist at the China-Britain Business Council, agrees: “Although experiencing the sharpest decrease of FDI since the financial crisis, China is not struggling for foreign investment – merely it is more selective in its targets, with priority sectors including high-tech manufacturing, energy efficiency, and elderly care services.”
And it cannot be said that China isn’t taking steps to open up its trade and investment with other countries. During the recent APEC meeting in Beijing, a landmark Free Trade Agreement with Australia was agreed, and further talks were held about a similar possible deal with South Korea next year. China is priming itself to improve trade with countries where it can gain the most, both in terms of inbound investment and in outbound investment as well. China’s development zones and changes to its Foreign Investment Catalogue are also signs that China wants to open up further to foreign investment – in the right industries of course.
“The amendments to Foreign Investment Catalogue reflect this intention. China’s shift to a consumption-led economy and continuous reform, with the Shanghai FTZ as a good example, will create more investment and trade opportunities,” says Ge.
These changes to the Catalogue are significant. According to Wang Dong, a National Development and Reform Commission official, who spoke to state-owned news agency Xinhua, these changes represent the biggest change to removing restrictions in the history of the Catalogue. They permit Wholly Foreign Owned Enterprises in fields such as Traditional Chinese Medicine, oil field exploration and development, automobile parts, aircraft components and engines, equipment manufacturing for air traffic control systems, and accounting and auditing. Foreign investors will also have greater access to Joint Ventures in fields such as the manufacturing of ground-based and water-based aircraft, the design and manufacture of vessel cabin machinery, the design and manufacture of civil satellites, the construction, maintenance and operation of railways, international sea transportation and the operation of performance venues. Overall, the restricted items are being more than halved, from 79 down to just 35.
So, despite the current drop, the future looks bright for FDI into China on a number of levels.


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