are foreign investors fleeing china?

Rumors that foreign capital is retreating from China were refuted by foreign direct investment （FDI） figures unveiled by the Ministry of Commerce （MOFCOM）.

Statistics from the MOFCOM showed that in the first seven months of this year paid-in FDI reached $71.39 billion， up 7.09 percent over the same period last year. In July， paid-in FDI stood at $9.41 billion， up 24.13 percent. A total of 12，626 enterprises were approved to set up shop in China from January to July， down 7.68 percent.

Cao Hongying， Deputy Director of MOFCOM’s Department of Foreign Investment Administration， said that China is still in a good position to absorb foreign investment. Although there was a decline in the number of newly established enterprises， paid-in FDI was on the rise.

In the first half of this year， China continued to improve its foreign investment environment by streamlining approval procedures in the petroleum， natural gas and coal bed methane industries， which helped boost July’s foreign investment growth.

MOFCOM will further lower the threshold for foreign investment， trim administrative formalities， and urge local governments to better serve foreign-funded enterprises， Cao said. More effort is needed to channel FDI to the services industry to help China’s bid to transform its economy and to direct investment to the country’s less developed central and western regions.

MOFCOM’s release contrasts significantly with gloomy reports by foreign watchers. JP Morgan Chase & Co. had lost faith in further economic growth in developing countries， and on August 13 advised investors to withdraw from emerging markets. Dow Jones insisted that capital was flowing out of China because funds outstanding for foreign exchange kept reducing as the statistics released by the People’s Bank of China （PBC） on August 20 showed. In July， funds outstanding for foreign exchange decreased by 24.47 billion yuan （$4.01 billion） in July and 41.21 billion yuan （$6.73 billion） in June.

Cao noted that foreign investment withdrawals have been a reality in recent years， but it didn’t necessarily mean that foreign capital was retreating from China on a large scale.

More efficient

Despite the decline in newly approved foreign-funded enterprises， paid-in FDI increased year on year， an indication， according to the MOFCOM， that China was making use of foreign funds in a more efficient way.

Enterprises that invested in China are multiplying， and foreign investments were shifting from traditional manufacturing to high-end manufacturing and the services industry. The scale of foreign-funded enterprises as well as their investment value has significantly increased. Statistics from the MOFCOM showed that for the first seven months， foreign investment of the manufacturing industry accounted for 41.18 percent of the national total， and the services industry， 49.93 percent.

Recently， some foreign-funded phar-maceutical giants， such as Glaxo-Smith Kline， Sanofi and Lilly， have been under investigation for allegedly violating Chinese law， arousing concerns as to whether the confidence of foreign investors would be undermined.

The Chinese Government has unswervingly stuck to the principle of reform and opening up， and actively making use of foreign investment， said Shen Danyang， the MOFCOM spokesman， at a press conference on July 17. Such cases further affirmed China’s resolution to optimize its investment environment and create opportunities for fair and equal competition.

Referring to the regulatory scrutiny faced by foreign companies， Shen said， “We firmly believe that such investigations will strengthen multinationals’ confidence in China， not the reverse.”

According to the State Administration of Foreign Exchange （SAFE）， the negative growth of funds outstanding for foreign exchange is caused by two factors. First， the U.S. economy is recovering at a faster pace， and the Federal Reserve plans to retreat from quantitative easing. Since May， emerging markets have been haunted by currency depreciation， declining stock markets and capital flight. Second， given the slowdown of China’s economy， some market forces have begun to shrug off the largest developing country.

In addition， June and July are the boom season for study tours by Chinese residents and dividend distribution by foreign-funded enterprises. In the past few months， the PBC， General Administration of Customs， China Banking Regulatory Commission and the SAFE have taken measures to regulate crossborder yuan settlements， export declarations， the management of bank financial products and foreign exchange inflow， and curb cash flows of false trade. These combined to drag down the funds outstanding for foreign exchange， but would not affect the utilization of foreign exchange.

Some capital withdrawals are even good for China’s economic development， such as the outflow of hot money. Zhang Yansheng， Director of the Institute for International Economics Research of the National Development and Reform Commission， believed that with the transformation of China’s economic development model， there would be a decline in foreign investments featuring heavy pollution， low added value and shortterm gains.

Still attractive

Despite the slowdown， a massive economy and huge consumer market make China an attractive destination for investment opportunities， a report from Anbound Consulting notes.

According to Shenyin & Wanguo Securities， in the context of gloomy global investment， China was second only to the United States in attracting foreign investment. Predictions are high that China will continue to attract steady foreign investment this year.

Lu Zhengwei， chief economist at the Industrial Bank Co. Ltd.， said China still has advantages in attracting foreign capital. “In the beginning， China’s cheap land and labor were quite attractive to foreign investors. Now， they value the huge market potential more. Although labor costs are rising in China， the quality of its labor force is also improving， and it can undertake jobs with higher added value，” said Lu.

Capital is withdrawing from emerging markets as a result of the recovery of traditional economies like the United States. However， China is the developing economy least affected. Foreign investment is bound to flood into China in the long run for its huge development potential， while capital withdrawals are temporary.

A number of foreign-funded enterprises mull over expanding investments in China. In April， General Motor （GM） announced plans to boost its investment to $11 billion in China before 2016. Now， investments have been carried out in new products， facilities and dealers.

Now， GM is trying to expand its dealership network into west China and into inland third- and fourth-tier cities. It has been predicted that another 1，000 dealers will be added to the Shanghai GM and SAIC-GMWuling Automobile network before 2017.

“The fact is，” said Lu， “foreign investors still favor the Chinese market.”