In Shandong and the three provinces in northeast China, the local governments have created favorable conditions to attract South Korean investment. In the process, they may have welcomed high-risk investors without fully investigating them. South Korea has been the top investor in Shandong Province in recent years. In 2006 and 2007, South Korean investment in Shandong totaled $4.84 billion and $2.14 billion, respectively, accounting for 29.8 and 19.4 percent of total FDI in the province for each year. The percentages were also the highest among all administrative regions in China. Shandong was the biggest victim when South Korean investors abandoned their Chinese plants in 2005, and it will suffer more than other provinces if South Korea is engulfed by the current financial crisis.

Countering the crisis

The financial crisis poses great risks to foreign enterprises in China, but it also presents opportunities. China can mitigate the impact of the financial crisis by counterpurchasing some of these enterprises. Counterpurchases can weaken foreign monopolies in the Chinese market, relieve pressure caused by China's growing foreign exchange reserve, and open strong investment channels for domestic capital.

In 2005, the State Administration for Industry and Commerce issued a report on monopolization by large foreign companies like Microsoft and Kodak. The report pointed out that foreign companies control certain aspects of the Chinese market. It is obvious and undeniable that these enterprises often hinder market competition with their advantages in technology, brand name, capital and management.

As of the end of September 2008, China's foreign exchange reserve stood at more than $1.9 trillion, increasing pressure on China to maintain macroeconomic balance. Counterpurchases will help the government relieve this pressure because foreign investors will bring foreign exchange back after their assets are sold. This approach is better than simply adjusting China's outward asset structure because it poses smaller political and commercial risks than investing overseas.

In recent years, hot money has flooded the domestic capital market and created capital bubbles, resulting in serious surplus capital problems in China. If the government can use counterpurchasing to guide this hot money into the real economy, it will stabilize the Chinese economy and benefit its development.

The relevant government departments should therefore change their thinking. While they continue to attract FDI, they also need to be cautious about spreading the financial crisis and seize the opportunity to counterpurchase foreign enterprises in China at low cost.

Finally, effective counterpurchases require a tactical approach. If the conditions at foreign enterprises are similar across sectors, China should focus first on enterprises that produce hi-tech and strategic products for the domestic market, then on those that produce ordinary products for overseas markets. Mastering the domestic side will be easier than mastering the overseas side, but in both areas China can turn the financial crisis into an economic opportunity.

The author is a research fellow at the Chinese Academy of International Trade and Economic Cooperation