Making China more investment-friendly

Business leaders say domestic economy primed for new growth that will be driven foreign capital

The Chinese economy is on the threshold of a new era of consumption-led growth that will be driven in strategic sectors by increased foreign direct investment, or FDI, according to business leaders and industry experts.

Thanks to the government's resolve to attract more FDI, segments newly identified as key to sustained growth - automation, digitalization, financial services, railway equipment, environmental technology and renewable energy - are all expected to benefit.

In January, the central government released a document outlining 20 measures to spur investment activities that have been sluggish. Among those are the opening-up of manufacturing, services and financial industries to FDI. The idea is that foreign businesses will be encouraged to bid for infrastructure projects through local franchises.

Eager to enhance the country's profile as an FDI destination, the National Development and Reform Commission, the country's top economic planner, recently took an unprecedented step by delegating power to provincial governments to approve proposals for foreign investment up to $300 million in areas not on the country's negative list, which specifies sectors where foreign investment is barred.

Foreign companies will also be entitled to participate in bidding for government procurement contracts, as long as their products are made in China. The government will also allow them to go public and issue bonds in local markets to diversify financing channels.

These measures suggest the government is not content with steady FDI growth in 2016 on the back of strong investment in services. FDI rose 4.1 percent year-on-year to reach $118 billion, according to data from the Ministry of Commerce, the government branch in charge of the country's outbound and inbound investment.

"Pushed by rising labor costs and weak global market demand, China is planning to have its growth depend more on domestic consumption and less on exports," says Zhang Yunling, director of International Studies at the Chinese Academy of Social Sciences in Beijing.

Zhang says companies from Europe, Japan and the United States have already discovered that it's time to invest more in Chinese research and development, as well as its science and technology and design businesses. New growth points are expected to present themselves as the economy becomes more sophisticated.

Under government policies, foreign companies will be encouraged to invest in high-end, smart and green manufacturing; to set up R&D centers; and to strengthen cooperation with domestic peers. They will also be allowed to join national science and technology programs.

Things have already started happening on this front. For instance, Germany's Siemens AG opened an industrial facility at its Wuhan Innovation Center in Hubei province last month. It will work with local companies - with a long-range perspective - to build digitization laboratories, intelligent water-testing laboratories, industrial hardware and software platforms and expert networks.

"The Wuhan facility will be geared to the situation and needs of local industries to provide such services as innovation project incubation, professional training and technical consulting for small and medium-sized enterprises," says Zhu Xiaoxun, senior vice-president of Siemens China.

The company kicked off the Siemens China Innovation Center initiative in China last year, focusing on research in the field of digitization. Under the program, Siemens has opened innovation centers in Qingdao, Wuhan and Wuxi to develop such technologies.

China is now intent on persuading global corporate majors to emulate Siemens.

"The government noticed that the country's ability to attract FDI had in recent years been challenged by a number of elements, including the monopoly of state-owned enterprises and the disappearing cost advantages of domestic production," says Ma Yu, a researcher at the Beijing-based Chinese Academy of International Trade and Economic Cooperation.

Worse, the shifting global political landscape and slower economic growth in both Africa and South America, may affect global capital flows. The Trump administration in the United States, for example, is keen to restore the health of the US manufacturing sector; and many countries in Europe will hold critical votes this year that could lead to significant changes in economic approach.

China must therefore further revise its negative list to better protect investment from developed markets, as well as offer foreign companies the right to acquire or merge with domestic companies, instead of building only Chinese-dominated joint ventures, Ma says.

Industries that are not on the negative list are expected to treat overseas and Chinese companies equally. Such measures have acquired a competitive dimension recently.

"Neighboring countries such as Vietnam and Thailand have been making their own moves to entice more foreign investment to their shores," says Huo Jianguo, former president of the Chinese Academy of International Trade and Economic Cooperation.

China believes any drop in FDI due to competition from the neighborhood may prove temporary. The Ministry of Commerce has repeatedly said that "because of its huge market size, industrial infrastructure foundation and logistics network, China is, in the long term, the most attractive market for global companies."

Such confidence stems from the effectiveness of measures adopted so far. Johnson Controls Inc, the US-based manufacturer of such things as air conditioners, control systems, batteries and electrical distribution products, will open its second global headquarters with a capacity for 1,200 employees in Shanghai in April.

"The Chinese government is seeking new solutions to improve energy efficiency and cut carbon emissions to design healthier environments in its cities," says Trent Nevill, vice-president of Johnson Controls and president of the company's Asia-Pacific region.

"With incentives put in place and high demand from the market, we can experience fast growth in our energy-efficiency solutions."

The company experienced fast growth in its battery business in China over the past five years, thanks to surging demand for replacement and original equipment manufacturing. It invested $200 million to build a plant in Shenyang, Liaoning province, to produce batteries for start-stop vehicles.

This type of vehicle battery can help automakers meet increasingly strict fuel economy and emissions regulations.

It will be a primary focus for the new facility. The Shenyang plant is scheduled to launch in late 2018 and will produce 6 million batteries annually, with the majority for start-stop vehicles.

zhongnan@chinadaily.com.cn