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The Prospect of Foreign Capital Utilization in 2006
2006-03-15
Zhao Jinping
The statistics given by the Ministry of Commerce indicate that in the first nine months of 2005, foreign direct investment across China continued a slightly downward trend that began at the beginning of the year. The actually invested capital was 2.1 percent less than that in the same period of the previous year. How to treat this new change and what will be the future trend? These issues have become the focus of widespread concern both at home and abroad. This article attempts to forecast the trend in 2006 on the basis of analyzing the situation of foreign direct investment in China in 2005.
I. The Features of Foreign Direct Investment in China in 2005
First, the contractual value of foreign investment has grown rapidly but the actual value of foreign investment has dropped modestly. The statistics on foreign investment indicate that in the first nine months of 2005, China approved 32,000 enterprises with foreign direct investment, largely at the same level in the same period of the previous year; the contractual value of foreign investment totaled 130.33 billion U.S. dollars, up 21.8 percent year on year; the value of the actually utilized foreign investment stood at 43.25 billion dollars, down 2.1 percent year on year. This pattern has steadily continued since the beginning of the year. It is expected that the growth level for the whole year will be close to the average level of the first three quarters.
Second, the actual investment in joint ventures and cooperative enterprises has dipped while the proportion of wholly foreign-owned enterprises has continued to rise. The growth of different types of investment in the first three quarters varied considerably. The contractual value of the investment in Sino-foreign joint ventures, cooperative enterprises and wholly foreign-owned enterprises, which were the three main forms of foreign investment, all grew at a pace of more than 10 percent. But when it comes to the value of actual investment, only wholly foreign-owned enterprises posted a 4.3 percent growth, bringing the proportion of the wholly foreign-owned enterprises higher to 71.2 percent or 4.4 percentage points higher than that in the same period of the previous year. As the proportion of the wholly foreign-owned enterprises rose to as high as 76.8 percent in terms of the contractual value of foreign investment in the same period, we can expect that in the future, the mainstream status of the wholly foreign-owned enterprises in the value of actual investment will continue to rise.
Third, the investment from Europe and Japan continued to grow vigorously and that from the United States continued to decline. In terms of the value of actual investment, different countries (regions) posted different growth performances. Investment from Japan and Europe went up by 16.2 percent and 18.4 percent respectively in the first seven months of 2005, on the basis of their 8 percent growth in 2004. The investment from South Korea entered a period of adjustment after a super-fast growth for several years straight, dropping 13.7 percent from the level of the same period of the previous year. The investment from the United States posted a negative growth in 2004 and dived further by 29 percent in the first seven months of 2005. Currently, investment from the free ports of British Virgin Islands and Samoa grew rapidly, with their proportions in the foreign investment attracted by China rising to 17.1 percent and 2.6 percent respectively. The investment from Hong Kong and Taiwan regions posted considerable declines.
Fourth, the value of the actually utilized foreign investment in China’s western region increased rapidly, while the eastern region continued to claim more than 90 percent of the foreign investment. In terms of the value of the actually utilized foreign investment in the first seven months of 2005, the western region, which used to see its growth far lower than that of the national average level, realized a 25.6 percent rapid growth. In particular, Sichuan, Guangxi, Inner Mongolia and Shaanxi became the main players in boosting the foreign investment growth in the western region. The actual foreign investment in the central region dived 30.4 percent following a 14.6 percent growth in 2004. The most dramatic fall occurred in Jiangxi, Hunan and Hubei. For the eastern region, the actual investment declined 1.4 percent on average. While Liaoning, Hebei and Shandong reported a most drastic decline, Guangdong, Beijing and Jiangsu maintained a fairly fast growth. Despite the accelerated growth in the western region, the structural problem that foreign direct investment had been concentrated in the eastern region still showed no signs of improvement. During this period, the eastern region claimed 90 percent of China’s actually attracted foreign investment while the central and western regions accounted for 6.7 and 3.1 percent respectively. In addition, the western region clearly lacked the staying power for the continuous growth of actual investment because the contractual value of foreign investment began to decline.
Fifth, the decline of the actual investment in the service industry was visibly more dramatic than in the manufacturing industry. Besides, the growth of foreign investment in some high-tech industries began to slow down. In the first seven months of 2005, the value of the foreign investment actually utilized by the trade in service sector, which was calculated according to WTO parameters, went down by 6.1 percent from the level in the same period of the previous year. This decline was slightly deeper than the 3.3 percent negative growth posted by the manufacturing industry during the same period. In particular, construction service, tourist service, finance and real estate all saw their foreign investment dropping by more than 10 percent and became the main factor to pull down the foreign investment actually attracted by the service industry as a whole. Transport service and the sectors producing and supplying electricity, gas and water all posted a rapid growth in their actually utilized foreign investment. This was directly related to the fact that the shortages of coal, electricity, oil and transport capacity beginning in 2004 had spurred investment demand and that these sectors were gradually opened to foreign investment. In addition, the sectors of transport equipment, special equipment, general machinery and electronic communications equipment, which posted more than 50 percent growth in 2004, demonstrated visible changes in 2005. While investment in the sectors of transport equipment and electronic communications equipment continued to grow, their growth rates had fallen back to about 10 percent. The sectors of special equipment and general machinery began to post negative growth.
Sixth, the average scale of foreign investment was clearly larger and major acquisitions occurred one after another. The average contractual value of the newly approved foreign direct investment projects was 3.51 million U.S. dollars in 2004, or 3.8 times that in 1990. In the first nine months, it rose further to 4.04 million U.S. dollars. This is an indication that the trend of foreign investment projects becoming larger will intensify in the future. In particular, the gradual improvement of the environment for acquisition investment will provide even more convenient conditions and opportunities for large investments. For example, India’s Mittal Steel Co., the largest iron and steel producer in the world, completed the formal acquisition of 36.7 percent of stocks of the Hunan Hualin Pipes and Lines Co., Ltd. on October 18, 2005 at the price of 340 million U.S. dollars. The application of the Paris Bank in France for acquiring 19.7 percent stocks of the Nanjing Commercial Bank at the price of 700 million U.S. dollars was approved on October 9, 2005 at the general meeting of shareholders. The Shanghai & Hong Kong Insurance Group Co., Ltd. acquired 9.91 percent of the stocks of China’s Ping An Insurance (Group) Co., Ltd. on May 9, 2005 at the price of 8.1 billion HK dollars (1.04 U.S. dollars) to become Ping An’s largest shareholder if the previous acquisition of 10 percent stocks was added. The 450-million U.S. dollar follow-up chip assembly project of the Intel Corporation in the United States went into operation in Chengdu, China in March 2005. Some of acquisition deals, based on the information of the China Acquisition Net, were completed through stock markets (including that in Hong Kong) and the amounts of their investments were not included in the Ministry of Commerce statistics on foreign direct investment.
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