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Intensifying Debate over the “Deteriorating Chinese Investment Climate” (Part 2)

Jianmin Jin
Senior Fellow, Economic Research Center

June 8, 2010 (Tuesday)

American Chamber of Commerce in Shanghai is bullish on the Chinese investment climate

Unlike the American Chamber of Commerce in Beijing (2,600 members in China) and the European Union Chamber of Commerce in China (1,300 members), the American Chamber of Commerce in Shanghai (4,000 members) is optimistic regarding the Chinese investment climate.

On April 1, 2010, the American Chamber of Commerce in Shanghai announced the results of its “Business Climate Survey” conducted from March 22 to 30. On the state of the business environment in China, 45%, 33%, and 22% of responding American companies said that over the last six months the business climate “improved,” “stayed the same,” and “worsened,” respectively. In other words, more companies view the climate as improving than worsening. Business performance is also trending upwards among member companies: 65%, 25%, and 10% responded that business over the same period had “improved,” “stayed the same,” and “deteriorated,” respectively. Most companies are also proceeding as planned, with 63% responding that business plans have “stayed the same.” Of the 37% of member companies whose plans have “changed,” over 80% (over 30% of overall companies) are expanding business such as investment, manufacturing, procurement, research and development, product development, and hiring operations. The American Chamber of Commerce in Shanghai’s conclusion is that the Chinese investment climate is not in a deteriorating trend.

Regarding the recently announced Indigenous Innovation Policy, 45% of companies have heard of it, and among them 30% (13% of overall companies) think it will hurt business. Though the results are less negative than the Beijing survey, the American Chamber of Commerce in Shanghai is also appealing to both the US and Chinese governments to revise this policy.

Certain executives of western companies and analysts attribute the disparate survey results between the Beijing and Shanghai Chambers to the following: (1) Beijing values government relations while Shanghai values the market; (2) The thinking of western companies in Beijing, which are unaccustomed to the increasingly competitive global climate; (3) As a result of policy shifts, competitive advantages are increasingly based on “products and services” rather than the status as “foreign capital.”

Seeing an improved investment climate, Japanese companies are expanding business in China

Japanese companies have a brighter outlook on the Chinese investment climate. According to JETRO’s “2009 Survey on Japanese Companies Expanding Business Overseas” published in March 2010 (conducted from November 2009 to February 2010), the “intellectual property protection problem” (1st, 57% of respondents) and “exchange rate issue” (6th, 18.8%) increased by 1.7% and 2.2%, respectively, as business risks in China. On the other hand, “problems in the undeveloped legal system” (2nd, 53.1%), “labor issues” (3rd, 29.7%), and “tax issues” (5th, 28.0%) decreased by 2.6%, 2.9%, and 2.6%, respectively. Excluding the serious issues of intellectual property and the lack of transparency in exchange rate policy, Japanese companies do not share the bearish sentiment of their western counterparts on the investment climate, and are not as concerned with China’s “Indigenous Innovation Policy.”

Regarding business development in China over the next three years, Japanese companies maintain an aggressive stance: 66.4% of respondents say they are “expanding existing business and considering new business,” a significant jump from 50.1% the previous year. This is also more than double the 30% of US companies that responded similarly in the American Chamber of Commerce’s (Shanghai) survey. Japanese companies planning to “maintain the scope of existing business” decreased, while companies “considering scaling back or withdrawing existing business” fell all the way to 0.5%, the lowest such figure since 2004.

Chinese government argues investment climate isn’t deteriorating, works to alleviate concerns

The Chinese government refutes the notion running rampant among western companies and media that the investment climate is worsening, contending that China has become an attractive investment region for multinational companies for the following reasons: (1) Despite the financial crisis, investment in China decreased only mildly at -2.6% in 2009 (other developed and developing countries alike suffered dramatic decreases), and has continued to rise since the beginning of this year; (2) China ranked at the top of the United Nations Conference on Trade and Development’s (UNCTAD) “World Investment Prospects Survey 2009-2011” announced in August 2009 as well as A.T. Kearney’s “2010 Foreign Direct Investment Confidence Index” published in January 2010; (3) Japanese, US, European, and other foreign companies in China enjoy high rates of return. China is restricting investment in highly polluting and energy and resource-consuming areas, continuing to welcome foreign capital, and is showing consideration towards western and other foreign companies by promising to address inadequate systems and policies.

At a post-National People’s Congress press conference in March 2010, premier Wen Jiabao promised that the government would sincerely listen to and deepen communication with foreign companies in China. As policy to improve the investment climate, he also emphasized that language suggesting discriminate practices in the Indigenous Innovation Policy, the subject of strong concern by western companies, would be removed, and that the territory of technological development would not affect the application of the policy. The government also announced the “View of the State Council on Further Use of Foreign Capital” on April 3, 2010, which stated that it would accelerate market liberalization for foreign capital, transfer the authority to approve foreign capital to local governments and simplify procedures, and expand regions that favor foreign capital. In this way, the Chinese government demonstrates its desire to further promote its liberalization policy and improve the domestic investment climate.