What is driving foreign investors' confidence in China?

By Cheng Dawei

Note: The following is an edited translation of a commentary from the Chinese-language "Commentaries on International Affairs."

A month before the Office of the U.S. Trade Representative released its Section 301 investigation report in March of this year and provoked the current US-China trade war, the American Chamber of Commerce in China released its “China Business Climate Survey Report.” The report said that in 2017, 73 percent of American companies achieved profitability in China, and 74 percent of its members plan to expand their investment in China this year - the highest percentage recorded in recent years. The survey also shows about 60 percent of its member companies regard China as one of the top three investment destinations, and 46 percent of respondents saying that they believe China will further open its market to foreign investment over the next three years. Another 62 percent of respondents believe that the transparency of China’s government policy and communication has improved over the past five years. The report shows that most of the American companies in China are optimistic about the country’s market.

According to the Chinese Ministry of Commerce, in the first half of this year, 29,591 new companies with foreign investment were established in China, almost double the number established the previous year. The 68.32 billion U.S. dollars of foreign capital was in the economy, a year-on-year increase of 4.1 percent. Among the major sources of investment, American investment in China increased by 29.1 percent year-on-year.

The Shanghai World Financial Center in Pudong New Area, Shanghai, on August 5, 2018 [Photo: VCG]

The impact that the China-U.S. trade war will have on foreign investment in China will not be known for some time. But the data described above shows that even with the trade war looming, there are good reasons for foreign investors to remain confident about China. 

First of all, China has the opportunity to grow both its production and its consumption. The global middle class is predicted to reach 4.9 billion people by 2030, two-thirds of whom will be concentrated in Asia, and predominantly in China. The opportunity for the integration of production and consumption will first be reflected in the openness of the Chinese market, which will attract more multinational companies to do business in China. China will contribute to world economic growth as it positions itself as a major consumer economy, thanks to the boom in high tech lifestyle products, and the relatively high acceptance among China's emerging middle class for new products. The Japanese Chamber of Commerce and Industry in China mentioned in its White Paper on ”The Chinese Economy and Japanese Enterprises 2018" that Japanese companies have increased their investment in the robotics and component parts industries, and their investment in services and retail industries has also increased. This suggests investment by Japanese companies in China has shifted from export towards domestic sales.

China's industrial chain advantage can provide comprehensive support for production by foreign-funded companies. China's high-level of industrialization, large-scale production capacity, extensive infrastructure, strong industrial support system, and robust labor force are all significant advantages. 

Companies or individuals in developed countries have a strong capability for innovation. But it’s a long journey from basic and applied research then to commercialization and mass production. But thanks to its large-scale production capacity and large market, China’s domestic market is able to provide support to innovative companies along the entire journey of taking a product to market. It can help to foster advanced technological developments to be commercialized quickly and at relatively low cost.

And China continues to increase its opening up to the outside world. On July 28, China's new "Special Management Measures for Foreign Investment Access List”, better known as the negative investment list, came into effect. The list specifies what products and services are closed to foreign investment. The changes include lifting the limits on foreign ownership of shares in the banking sector, and in 2021, scraping foreign capital ratio restrictions across the financial sector. In the manufacturing sector and the auto industry, restrictions on foreign ownership in special and new energy vehicle manufacturers were dropped. And in 2020 and 2022 respectively, the radio of foreign investment in commercial and passenger vehicle manufacturers will be lifted.

As long as China's economy continues to run smoothly, its huge market and broad industry capacity will continue to be a magnet to foreign investment. There is no reason for people to doubt China's ability to attract foreign investment because of a trade war.

(Cheng Dawei is a professor with the School of Economics at Renmin University, and a research fellow with the National Academy of Development and Strategy)