Foreign investment in China has continued robust growth despite the new corporate income tax policies. Figures from the National Bureau of Statistics show that paid-in foreign direct investment (FDI) (excluding investment from foreign financial institutions) totaled $74.8 billion in 2007, up 13.6 percent year on year. It was the 15th consecutive year that China's FDI ranked first among all developing countries.

In September 2006, the British Economist Intelligence Unit jointly issued a report with the Columbia University in the United States, claiming that though China ranked first in FDI, its position was being challenged by other emerging economies. "As China's salaries increase, the cheap labor force in some ASEAN (Association of Southeast Asian Nations) countries will attract more FDI," said the report. It forecast the FDI gap between China and the 10 ASEAN members would narrow in the near future.

France's BNP Paribas once contended that apart from ASEAN members such as Viet Nam and Indonesia, countries such as India, Brazil and Russia had been establishing all kinds of special economic zones, development zones or export processing zones, which diverted FDI that could have been invested in China.

However, judging by the current situation, those factors do not pose serious problems for FDI into China.

"China has enormous attraction for FDI," said Sun Changtai, Vice President of the Beijing Association of Enterprises With Foreign Investment. "When the global economy showed signs of recession, the Chinese economy remained robust and opened even further. Any knowledgeable man would not give up a huge market like China."

From quantity to quality

Though FDI is increasing, the number of newly established foreign-funded companies is declining. In 2007, a total of 37,871 foreign-funded companies were created, down 8.69 percent from the previous year. These figures show FDI to China has changed from quantity to quality, something which is being promoted by the government.

In March 2007, the Ministry of Commerce issued guiding opinions on FDI that stated the country should optimize the quality of foreign investment. Last year, the government made considerable adjustments to the policy guiding the utilization of foreign investment, promoting the change in the use of foreign investment from quantity to quality.

Last March the government revised the Corporate Income Tax Law, unifying the income tax rate on all enterprises on the mainland at 25 percent. In the past, the average income tax on foreign-invested companies was around 13 percent, whereas that on domestic enterprises stood at 30 percent. The new Corporate Income Tax Law set aside preferential treatment for foreign-funded companies, enabling Chinese companies to compete with foreign-invested companies at the same level. However, the raised income tax for foreign-invested companies adds pressure to their operations. Some feared foreign investment would be reduced or retreat from the Chinese market.

The other policy change was the new version of Catalog for the Guidance of Foreign Investment Industries published on December 1, 2007. The new catalog no longer encourages foreign investment in the traditional manufacturing industry, major mining projects and export-oriented industries in a bid to protect environment and save national resources.

Under the new catalog, foreign-invested companies heavily dependent on a cheap labor force and natural resources will find it hard to make a profit in the country. If foreign-invested companies want to share the rapid economic development of China, they must rely on their comprehensive competitiveness.

Shi Guangsheng, President of the China Association of Enterprises With Foreign Investment, claims the two changes represent China's basic policy for attracting foreign investment in the future. The changes ended the preferential treatment to foreign-invested companies, as well as local governments' impulses to attract investment regardless of environmental protection. For a long period of time, there were many negative sides of the quantitative expansion of foreign investment, such as low performance and false investment.

"But now, China has switched to the qualitative expansion of foreign investment, providing foreign-funded enterprises with vast opportunities for in-depth development in the country," said Shi.

Many experts predict that foreign investment quality in 2008 will improve significantly, while the number of foreign-invested companies will not grow rapidly and might even decrease. The trend will be maintained for the next few years.

New policy

On January 19 this year, Chen Deming, Minister of Commerce, said the major aspects the country would work on to improve was foreign investment quality.

"Restricted by such factors as resources and environment, we should proceed from the real demand of the national economy and optimize the usage of foreign investment," Chen said. He noted that five aspects are being implemented to improve foreign investment.

First, encouraging foreign investment in terms of independent innovation. The new catalog will be carried out strictly and foreign investment in hi-tech, energy-conservation and other high-end industries will be promoted. Foreign investment in information technology, new material and bio-tech industries is encouraged to establish technology alliances with Chinese companies and research institutes. In addition, foreign investment is encouraged in modern agriculture.

Second, optimizing the distribution of foreign investment. The government will set up industry relocation centers in such eastern provinces like Guangdong and Jiangsu and Shanghai Municipality, while establishing demonstration parks in central and western regions to receive the industries transferred from the east.

Third, attracting foreign investment to stimulate the service industry. China's financial, insurance and telecommunications industries will be further opened. Transnational companies are encouraged to set up regional headquarters, as well as purchase and logistic centers in the country.

Fourth, innovating the use of foreign investment. Foreign companies are encouraged to set up business start-up investment funds. The country will improve business start-up investment exit mechanisms to support the development of small and medium-sized companies, optimize the investment environment, improve the management of complaints from overseas investors, and protect the legitimate rights and interests of overseas investors in accordance with the law.

Fifth, creating new advantages for state-level economic zones. Economic development zones at the national level will be promoted and upgraded. The government will adopt effective measures to support the infrastructure construction of state-level economic development zones in central and western regions.

Zhang Li, researcher with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, said the policy change is aimed at upgrading the quality of foreign investment and that the basic principle of attracting foreign investment has not changed.

Since the late 1980s, China has adopted incentive policies to attract foreign investment. Currently, foreign-invested companies contribute about one third of the country's total industrial output value, one-fifth of China's all tax revenue, and over 20 million jobs. By the end of November 2007, over 190 countries and regions had invested in China, and altogether 630,000 foreign-invested companies had been approved, with paid-in foreign investment mounting to $747.1 billion. Nearly 490 of the world's top 500 companies have established branches or agencies in the country. Transnational companies have set up 1,160 research and development centers. Foreign-invested companies have already become an important part of China's socioeconomic development. (Source: Ministry of Commerce)