Zharov M.V. Financial University under the Government of the Russian Federation

Teacher: lecturer of «IEIB» dpt. of Financial Univesity Silantieva E.A

Investment climate (for example People’s Republic of China)

This article represents a small observation of the situation of investment climate in People’s Republic of China compared to other parts of the world. It is fully devoted for future prospects of Chinese development and its integration in the world financial system.

The uniqueness of the article lies in author’s evaluation of Chinese strong and weak points for investing, investment opportunities for other parts of the world, investment climate in China including comparison with other countries, as well as introducing author’s ideas about future trend.

Key words: investment climate (инвестиционный климат), business environment (условия коммерческой деятельности), investment (инвестиции), foreign direct investment (прямые иностранные капиталовложения), international trade (международная торговля), world economic relations (мировые экономические отношения).

During last 20 years China showed a significant economic development. And it still continues developing quite fast, which cannot be noticed by other “big players” of the world.[8] Nowadays Asian continent is considered as a good opportunity to invest money and China plays one of the most important roles in international trade. For many years this region was closed for foreign trade and now it becomes one of the most preferable areas for foreign investors. One may ask what has changed since XX century? The answer is almost obvious; globalization and foreign integration influenced all parts of the world, that’s why China can’t just stay outside world economic relations. This country is very open now. Chinese people search for new links and relations with other countries. They want to develop as well as to be developed.

Because of that China is looking for new investors not only inside the country but also outside it. However, to attract foreign investors a lot of work should be done. Nobody wants to spend his/her money if they cannot be sure they would not lose it. And to make them be sure, Chinese government should provide legal background for foreigners with many different opportunities to invest their money. In economic sense it is called investment climate. So what is investment climate in China like? What strengths and weaknesses does it have? And how does Chinese government attract foreign investments?

First of all, foreign direct investment (FDI) should be mentioned. To analyze any economic activity statistical data must be represented. That’s why, according to United Nations Conference on Trade and Development (UNCTAD), inward and outward FDI in China was $473,083 million in 2009, $587,817 in 2010 and $711,802 in 2011 respectively. And we should not forget about Hong Kong as an independent part of China. FDI in Hong Kong in 2010 was $1,138,365 billion, which made Hong Kong take the 2^nd place after the USA.[3] That means foreign investors perceive China as a stable economic zone. They are not afraid to leave their money in China even when global economic crisis appeared. It can be also considered as a signal for other investors that Chinese government is responsible for their money and able to safe it in times of recession as well. But still, legal and regulatory framework of China restricts a lot foreign investments. Many standards are undefined and a lot of problems still exist and should be solved. So the main problem of China is its political system. It is well known, they are trying to make all their regulations and restrictions more flexible for foreign citizens, however it is not so easy as it seems. Many foreign investors face unexplained restrictions. China has adopted policies in specific sectors that appear designed to restrict foreign participation. For example, such sector is machinery-manufacturing industries. All manufacturing should be supported with national suppliers, which don’t provide any opportunity for foreign investments. Chinese government also has a lot of restrictions devoted to protection of national enterprises that usually represent a monopoly. So many ways to investment are closed by legal support and cannot be explained as wise decision. But anyway this is China and its historical contribution of closed country has its own place in every decision.

Sourse: Recent FDI trends in the APEC region, http://www.apec.org

This table shows APEC annual FDI inflows. As we can see total amount of FDI to APEC is $733 billion. It is obvious that the first place belongs to the USA. Nowadays nobody can compete with this country but year-by-year its role is reduced and countries of the Asian region become stronger. And one of the strongest competitors is China. Here we can consider that China has the second place with 17% because 25% includes several countries not the only one. And 17 percent is quite a big share compared with total amount and especially with other countries. It can be predicted that China’s FDI will continue slowly increasing and finally reach the level of the USA FDI in several years. But FDI can be considered as the only one parameter which describes investment climate in the country. That’s why let’s switch to Chinese free economic zones (FEZ).

China’s free economic zones are one of the strongest Chinese features. China’s duty-free import/exports zones are Dalian, Guangzhou, Shanghai, Tianjian and Hainan. Besides these ones, there are also numerous free trade economic zones and cities. They can offer almost the same opportunities and benefits to foreign investors including reduced income taxes, resource and land use fees, import/export duties etc. What is more important, after becoming a member of WTO in 2001, China’s government made a big step forward efficient legislation for such zones. To open foreign exchange accounts, foreign-invested firms must apply to China’s State Administration of foreign Exchange (SAFE). This system is needed to determine the amount of foreign exchange the firm needs. All transactions are regulated and supervised to provide high safety and efficiency for the economy.

China know how to guide investments to problematic areas. Many regions of China are developing due to huge inflow of money from foreign investors. A number of free ports and bounded zones have been also established. Such zones are very efficient and considered as preferable place to invest. Local authorities use these investments to develop most favorable industries. So both sides benefit from such kind of investment transactions and seek for further cooperation. Chinese Special Economic Zones (SEZ) are in some case like “goldmine” for foreign investors. Of course, there are some restrictions and regulations and your activity is accurately supervise but at the same time one is offered a significant number of benefits, which have a great number of variations to chose. As well, there is one more interesting point about China’s investment climate that should be mentioned and it is called “Business environment risk rating”.

It is well know that supply of cheap labor and rapid economic growth make China the top destination for foreign direct investment. But is it possible to calculate the real rating for business environment for different countries? Such rating exists and it is called business environment risk rating. And China takes the 7^th place with overall score of 51.8 points in 2011.[7] It is a very complicated rating including special features of the country, legal framework, investment opportunities etc. In this table we can also notice a column named “Trend”. China has equal sign, which means in 2011 it is stable and will continue growing.

Figure B. BMI Business environment risk rating, 2011

Sourse: Business environment, www.busineesmonitor.com

FDI is closely connected with business environment, including legal institutions, corruption, infrastructure, labor force, market orientation and operational risk. Still the main idea is that China is not ready to allow big foreign investors cooperate on the national market and compete with national monopolist enterprises of main manufacturing export industries. That’s why foreign corporations face lots of restrictions concerning foreign investments in these industries. Legislation is still frequently inadequate with many conflicts between different international and local norms. It seems quite inconsisted and opaque. Moreover, international economic regulations cannot be simply implemented in Chinese system and need a special unique approach, which can be hardly defined.

Corruption is the problem of almost any country in today’s world. And China is not exception. However, the effectiveness of struggling with it in China has been improved much since 2008. President’s Hu Jintao main priority was lowering the level of corruption in the country. After a month of his governing passed almost 1,800 officials were incriminated in corruption. One may ask how corruption is connected with foreign investors.[2] The answer is quite simple, legal background is one of the most important parts of investment climate in the country. What is more, investment activity is connected with financial operations and transactions. And when the government restricts such operations, some officials consider this situation as a good chance to make some money. Here comes the corruption, which destroys the usual work of the legal system and exposes all financial transactions and treaties to risks. That’s why it is so important to solve the problem of corruption to improve business environment in the country.

Considering property rights and intellectual property rights, one should understand that China is a unique country with its own vision of property law. Chinese law says that all land is owned by “the public”. Which actually means that individuals have no rights to own land. The law allows only to rent the land or to own building on the land. Foreigners usually hold long-term leases for land use. So if one wants to run your business in China one should be ready to rent the land for many many years. As for intellectual property rights, China lacks much in protection for intellectual property rights. After becoming the member of WTO, China just simply adopted WTO agreement on Trade-related aspects of Intellectual property (TRIPS) with out any improvements. Enforcement is quite poor and penalties are insufficient. Trademark and copyright violations are widespread and nobody is going to stop it.[9]

The next point is infrastructure. Everybody knows Chinese people like to build. Somebody would rather say: “They adore building”. In 2009 the country’s construction industrial was valued at $265.4bn. By 2014 it is expected to reach the point of $470.0bn, which is 6% of national GDP.[5] So it is good to invest in infrastructure of China. It is very prosperous field of investment as nowadays China builds a lot of objects not only on the territory of the country but also outside. Purchasing real state was always one of the most effective ways to invest your money. And China has an insatiable appetite for infrastructure development.

Speaking about labor force, it should be mentioned that Chinese labor force is expanding rapidly. Official unemployment rate is 4.2% on year average.[1] Also Chinese labor is one of the cheapest of the world, which makes it rather attractive for foreign investments. But still, Chinese economy continues to grow that’s why the lowest level of salary is also increasing, setting a new salary floor for employees. Nevertheless, foreign investment are interested in manufacturing in China therefore cheap labor allow them to lower costs of labor and set even bigger business.

Observing market orientation, some points should be understood. Since 1990s China has substantially reformed the investment regime and foreign investors now has an opportunity to manufacture and sell a lot of goods on the domestic market. The government wants to make service sector a key area to attract foreign investment. Except service sector China is also oriented for new high-tech industries and energy sectors, which are very perspective and need foreign investing a lot.

Considering taxes, China unified the income tax treatment of domestic and foreign enterprises in 2008. It was set to 25% and give equal opportunities for both domestic and foreign manufactures. However, this reform of 2008 also includes rules relating to controlled corporations, thin capitalization and foreign tax credits. Corporate tax was set to the level of 33%, a 30% national tax and 3% local tax. But foreign investment enterprises can pay lower corporate tax depending on their type of business and location. In some specialized areas (free economic zones) state tax can be reduced to 15% or 24%. Local tax of 3% may be reduced by the local government.[6]

Summing up everything mentioned above, we can say that nowadays China is one of the best places in the world to invest money. Rapid growth of Chinese economy guarantees investor good inflow of money and rising profit. Cheap labor lowers the cost of production. Free economic zones can reduce taxes prescribed by the government. However, many investors should choose the field of investment wisely not to face legal restrictions and conflicts. The key point is simply to follow government desires and search for developing areas in the country to get the help of government as well. In general, China’s investment climate can be considered as rather good compared to other developing countries. Moreover, year by year it becomes better and better and soon can present one of the most desirable places to invest money. So this country can be regarded as an example for other countries how to make inner investment climate preferable for foreign investors.

List of literature.

1. Cheng, Allen T., Chinese Stocks Take Center Stage., Institutional Investor-International Edition; Jun2011, Vol. 36 Issue 5, p72-73

2. Quazi, Rahim M., International Journal of Business & Economics Perspectives; Fall2011, Vol. 6 Issue 3, p70-79

3. Inward and outward foreign direct investment stock, annual, 1980-2011, UNCTAD, http://unctadstat.unctad.org/TableViewer/tableView.aspx

4. Timberlake, Nick, Bric fix., Money Marketing; 6/7/2012, p48-48

5. Capital inflows to China; Hot and bothered, 2008, the economist journal

6. China: Hope and Reality? Asian Venture Capital Journal, 5/18/2010, Vol. 23 Issue 18, p8

7. China Business Forecast Report; 2011 1st Quarter, Issue 1, p29-38

8. Political Risk Yearbook: China Country Report; 2011, Special section p1-25

9. Hong Kong Business Forecast Report; Q1 2011, Issue 1, p22-23

10. Hong Kong Business Forecast Report; Q1 2011, Issue 1, p28-29

11. Worries Over Investing In China Grow, WWD: Women's Wear Daily; 8/31/2010, Vol. 200 Issue 45, p10