Foreign direct investment tops US$60b
(Shenzhen Daily/Agencies)
Updated: 2006-01-16 08:47

The country attracted more than US$60 billion in foreign direct investment in 2005 for the second year in a row as firms flocked to take advantage of the country’s low wages and fast-growing market of 1.3 billion people.

Foreign direct investment (FDI) totaled US$60.33 billion last year, just shy of the 2004 record of US$60.63 billion, after a US$7.2 billion spurt in December, the Ministry of Commerce said Friday.

“In 2005, foreign investment into China maintained sound momentum and the quality of foreign investment improved,” Chong Quan, a ministry spokesman, said in a statement.

The ministry said the data excluded the rising tide of investment into China’s banks, brokers and insurance firms.

FDI has been crucial to the export boom that has turned China into the world’s third-largest trading nation. Foreign-owned firms account for almost 60 percent of the country’s exports.

China has raked in more than US$1 billion a week in FDI since it joined the World Trade Organization in late 2001, a pace that experts say might moderate in 2006 and beyond, but not by much.

“I think the general trend is that there is more to come, but maybe at a slower pace,” said Edgar Doerig, head of the economic and commercial section at the Swiss Embassy in Beijing.

One possible damper on FDI is a long-awaited plan to unify the tax rate paid by domestic and foreign-invested companies, said Xing Houyuan, a senior researcher at the Chinese Academy of International Trade and Economic Cooperation, a think tank under the Ministry of Commerce.

She said the change, which is expected to raise the tax rate by foreign firms, would probably have the greatest impact on investment in sectors already facing the threat of overcapacity.

“I expect foreign investment in sectors such as manufacturing, processing and real estate will shrink, but investment might increase in the services sector when it opens more to the outside in 2006,” she said.

Many foreign firms enjoy preferential income tax rates as low as 15 percent set by local authorities while domestic firms are typically taxed at 33 percent. No date has been set for a unified business tax rate.

Tang Min, chief economist with the Asian Development Bank in Beijing, agreed that the pattern of FDI was likely to shift toward services like banking and away from manufacturing.

“Some of the labor-intensive, cheap labor type of export-orientated FDI will gradually move more to the center of China and, if not, move out of the country,” he said.

Enticing such investment inland instead of letting it slip away to places like Vietnam and Bangladesh would depend on the government creating the right incentives, Tang said.

“Whether China will continue to achieve such high-speed growth in foreign investment in the mid to longer term is questionable unless China develops new policies,” he said.

Hong Kong remained the top source of the mainland’s FDI in 2005, accounting for US$17.95 billion, or 29.75 percent, of the total.

FDI from the 15 core members of the European Union jumped 22.5 percent, while FDI from the United States dropped 22.3 percent, the ministry said without giving figures.

Charles Martin, president of the American Chamber of Commerce-China, said he was confident China would remain attractive to foreign investors after business tax is unified.

“I think there will continue to be some great tax deals in the inland provinces, in western provinces. And I think in high technology there will continue to be some very good opportunities for tax relief on the coastal areas,” he said.

China’s booming eastern provinces drew 2.59 percent more FDI in 2005, while FDI in the poorer central and western provinces jumped 27.75 percent and 11.3 percent, respectively.

With China’s economy and incomes rising fast, Martin named banking, financial services and healthcare as promising sectors for foreign investors.

Although startup investment in manufacturing facilities was likely to slow, Martin said he expected more foreign investors to expand capacity through mergers and acquisitions.

“I’ve seen more private equity firms coming through here in the past year than in the previous year, and I think that trend continues,” he said.