Economy of The People's Republic of China - Foreign Investment

Foreign Investment

See also: Qualified Domestic Institutional Investor, Qualified Foreign Institutional Investor, China Investment Promotion Agency, China Council for the Promotion of International Trade, and Ministry of Commerce of the People's Republic of China

China's investment climate has changed dramatically with more than two decades of reform. In the early 1980s, China restricted foreign investments to export-oriented operations and required foreign investors to form joint-venture partnerships with Chinese firms. The Encouraged Industry Catalogue sets out the degree of foreign involvement allowed in various industry sectors. From the beginning of the reforms legalizing foreign investment, capital inflows expanded every year until 1999. Foreign-invested enterprises account for 58–60% of China's imports and exports.

Since the early 1990s, the government has allowed foreign investors to manufacture and sell a wide range of goods on the domestic market, eliminated time restrictions on the establishment of joint ventures, provided some assurances against nationalization, allowed foreign partners to become chairs of joint venture boards, and authorized the establishment of wholly foreign-owned enterprises, now the preferred form of FDI. In 1991, China granted more preferential tax treatment for Wholly Foreign Owned Enterprises and contractual ventures and for foreign companies, which invested in selected economic zones or in projects encouraged by the state, such as energy, communications and transportation.

China also authorized some foreign banks to open branches in Shanghai and allowed foreign investors to purchase special "B" shares of stock in selected companies listed on the Shanghai and Shenzhen Securities Exchanges. These "B" shares sold to foreigners carried no ownership rights in a company. In 1997, China approved 21,046 foreign investment projects and received over $45 billion in foreign direct investment. China revised significantly its laws on Wholly Foreign-Owned Enterprises and China Foreign Equity Joint Ventures in 2000 and 2001, easing export performance and domestic content requirements.

Foreign investment remains a strong element in China's rapid expansion in world trade and has been an important factor in the growth of urban jobs. In 1998, foreign-invested enterprises produced about 40% of China's exports, and foreign exchange reserves totalled about $145 billion. Foreign-invested enterprises today produce about half of China's exports (the majority of China's foreign investment come from Hong Kong, Macau and Taiwan), and China continues to attract large investment inflows. However, the Chinese government's emphasis on guiding FDI into manufacturing has led to market saturation in some industries, while leaving China's services sectors underdeveloped. From 1993 to 2001, China was the world's second-largest recipient of foreign direct investment after the United States. China received $39 billion FDI in 1999 and $41 billion FDI in 2000. China is now one of the leading FDI recipients in the world, receiving almost $80 billion in 2005 according to World Bank statistics. In 2006, China received $69.47 billion in foreign direct investment.

Foreign exchange reserves totaled $155 billion in 1999 and $165 billion in 2000. Foreign exchange reserves exceeded $800 billion in 2005, more than doubling from 2003. Foreign exchange reserves were $819 billion at the end of 2005, $1.066 trillion at the end of 2006, $1.9 trillion by June 2008. In addition, by the end of September 2008 China replaced Japan for the first time as the largest foreign holder of US treasury securities with a total of $585 billion, vs Japan $573 billion. China has now surpassed those of Japan, making China's foreign exchange reserves the largest in the world.

As part of its WTO accession, China undertook to eliminate certain trade-related investment measures and to open up specified sectors that had previously been closed to foreign investment. New laws, regulations, and administrative measures to implement these commitments are being issued. Major remaining barriers to foreign investment include opaque and inconsistently enforced laws and regulations and the lack of a rules-based legal infrastructure. Warner Bros., for instance, withdrew its cinema business in China as a result of a regulation that requires Chinese investors to own at least a 51 percent stake or play a leading role in a foreign joint venture.