Before China's door-opening policy came into being, all investments in the country came out of the government's coffers, which led to misallocation of resources and wasted money on poorly executed projects. Fast-forward 20 years to today, and China is now the world's largest recipient of foreign investment.

Investment Proportion

Investments in China are classified into three main categories: state, private and foreign, accounting for 47, 44 and 9 percent, respectively, of total investment in the country in 2001. Last year, domestic investments increased by 16 percent, while foreign investments increased by 12.6 percent. As private investment has been growing at an average annual rate of 23 percent since 1980, it should be on par with state investment in the country.

Foreign investment in China generally does not show up in the GDP growth figures because it makes up less than 10 percent of total indigenous investment. This also explains why the slowdown in foreign investment in China during the SARS crisis will have little impact on China's GDP figures. Foreign investments' in China, however, drive the market economy, while at the same time help the country expand its overseas markets.

China's market-oriented economy and its global footprint means that despite accounting for only a small proportion of total investments made in China, foreign investment remains a crucial element in the Mainland economy.

Investment Environment

To foreign investors, China's main attractions are its political stability, rapid economic growth, cheap labour, huge market potential, preferential tax treatment and improving infrastructure. As such, the hardware environment is a highly competitive investment market. Though the soft environment still has many shortcomings, such as complicated approval procedures, lack of transparency in the government and insufficient protection for intellectual property, many issues have improved since China was admitted into the World Trade Organisation (WTO).

By comparison, private Chinese investors face narrowing finance channels, stricter regulations on market access and higher tax bills. For example, in the purportedly open municipal economy of Dongguan, only 41 of its 80 industries are open to indigenous private investors, compared to 62 sectors for foreign investors.

In addition, private investors have to contend with inadequate legal protection, damage and deprivation of private assets, and higher fees and penalties than foreign investors have to put up with. Despite the seemingly unlevel playing field, a number of private Mainland enterprises, such as the New Hope Group and the Hong Dou Group, have the energy and intelligence to work through these obstacles and keep their businesses growing.

Sectoral Analysis

Although 70 percent of foreign funds entering China are channeled into the manufacturing sector, they generally finance capital-intensive industries, especially the advanced technologies, as opposed to mainly labour-intensive industries in the past.

At the last count, foreign enterprises had set up over 400 research and development organizations. Overseas money is also increasingly being injected into commercial services. In the first half of 2003, investments in the sector grew 28 percent over the same period last year. With CEPA allowing Hong Kong service companies to enter the Mainland market from January 1, 2004, the 18 service industries that have been given easier market access into China under the agreement are expected to attract a substantial number of Hong Kong investors.

Mainland investors, on the other hand, tend to focus on traditional labour-intensive manufacturing industries, such as food processing and clothing, in addition to general services such as wholesale, retail and real estate. Capital- and technology-intensive private investments by Mainland firms, such as telecommunications, transportation and finance, are few and far between. Nonetheless, private investors can also succeed in such sectors if they can break through the financing bottlenecks. Huawei Technologies and the Mingsheng Banking Corporation are two examples of how domestic private investors can reap good returns in an otherwise tough sector. In 2000, registered capital from private Mainland enterprises in these sectors was less than 0.7 million yuan, compared to 18 million yuan invested by foreign enterprises.

Future Course

As China moves towards a market economy, its planned economy is becoming increasingly insignificant. Apart from a unified tax system for private Chinese and foreign enterprises, the government is also planning to standardize market entry policies to secure a level playing field. Once the differences in the investment environment have been leveled out, China will have completely transformed its investment environment into a market economy.

Ruby Zhu is the Chamber's Assistant Economist. She can be reached at, ruby@chamber.org.hk