Challenges ahead as country rises higher on the value chain

The shift of the Chinese economy toward new growth drivers in services and consumption is strongly evidenced by an ongoing flow of inbound investment.

FDI in the services sector jumped by 30 percent in the first two months of the year while investment in manufacturing grew just 7.1 percent, according to the Ministry of Commerce.

As far as China's top policymakers are concerned, investment including FDI will continue to be a pillar of future growth as the other two major growth engines－exports and consumption－struggle to deliver any substantial new growth in the short term.

Analysts said that China's exports are likely to suffer even sharper declines than GDP growth, while consumption will remain largely a long shot, as domestic purchasing power gradually grows.

To accommodate more foreign investment, Beijing has been cutting red tape and streamlining administrative approvals for foreign business.

The National Development and Reform Commission, the country's top economic planner, recently cut the number of business sectors restricted for foreign investment from 79 to 38, and made a slew of sectors including e-commerce, logistics, transportation, finance and culture more accessible to international investors.

At the same time, the government is improving the country's legal infrastructure, by integrating three separate laws that govern foreign business into one unified piece of legislation.

But such improvements do not necessarily mean it will be immediately easier for foreign companies to navigate the Chinese market.

Some of the world's biggest names are also facing fast-emerging Chinese rivals, as the country pushes on with its national strategies for economic growth, including "Made in China 2025", which is focused squarely on upgrading industrial output.

"As Chinese companies grow larger and stronger, they are becoming more formidable competitors to foreign firms," said Ulrich.

"Investors are having to be more innovative by offering better products and services that not only meet the needs of maturing Chinese consumers, but also are difficult to be replicated by local firms."

Ulrich pointed out that foreign companies are also facing a shortage of highly skilled labor as China moves up the value chain toward higher technology industries.

"They might have to allocate more resources into education and training for local staff to prepare them for jobs requiring higher skills," she said.

A recent survey of global chief executives from more than 1,300 companies in China, by auditing firm Price water house Coopers, showed that only 36 percent of the respondents were "very confident" on their growth prospects in the next 12 months.

Some 71 percent of them, however, said there are more growth opportunities for companies now than there were three years ago, the survey showed.

Analysts said these seemingly contradictory results indicated that China remains a magnet for foreign investment in the long term, although some of them were concerned about the short-term uncertainties.

Wang Zhile, a senior researcher at the Chinese Academy of International Trade and Economic Cooperation, said that foreign investment will remain a crucial engine in upgrading Chinese industries, and suggested more foreign companies should be encouraged to merge with domestic companies through the public-private partnership reform.

"Foreign companies that are influential on the global value chain often bring with them the most advanced technology and management expertise, both of which are badly needed by many Chinese enterprises," he said.

"Some of the most cost-driven foreign companies may leave China, but market-driven companies will not," he added.

 

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