Tag Archives: Foreign Direct Investment

The Chinese Economy and Market

While the largest economies came to a screeching halt in 2008, and have since then, began a slow trek, the Chinese government responded quickly to the economic crisis with a combination of monetary, fiscal and bank lending measures that protected its economic growth. The following year, when the majority of countries were seeing negative or low single digit growth and the US saw a negative growth of 3.9 percent, China’s Growth Domestic Product (GDP) grew by 9.2 percent, 10.3 percent the following year and 9.2 percent last year. In 2012, the Asian nation’s GDP was expected to grow by 7.9 percent, and estimates show projected growth for next year of between 8.3 percent and 8.8 percent. During those years, the United States saw 3.0 percent growth in 2010 and 1.7 percent growth in 2011. This year the large American state is expected to see growth of around 2.3 percent and 2.6 percent next year.

The Market:

According to China’s 12th Five-Year Plan (12th 5YP) that came out in 2011; the country will increase consumption activities from approximately 35 percent of GDP in 2010 to 50 percent by 2015. The current percent of 35 is low when compared to the United States and Brazil, where consumption activity makes us 70 and 63 percent of the GDP, respectively.

After Canada, China is the US’ largest trading partner. In 2010, American firms exported more than $91 billion in products to China. American exports of agricultural goods, fishery and forestry from January to December 2011 reached a new high of $21.9 billion, an increase of 13 percent from the previous year. Estimated rise in Chinese income and demand for raw materials and finished foodstuffs are expected to result in an increase in imports. Currently, Chinese buyers 45 years or younger makes up 80 percent of the people buying luxury goods, and by 2020 China’s middle class is expected to expend to 45 percent of the population. By 2015, the Chinese people will account for 20 percent of the consumption global luxury goods, or $27 billion.

Foreign Direct Investment:

China’s outbound FDI rose 14.1 percent from 2010 to $46.3 billion in 2011. To the United States Chinese FDI is expected to reach 12 billion in 2012. Inbound FDI reached $95 billion, a 16 percent increase during the first three quarters of 2011, and an overall 15.9 percent incline from the previous year.

While the government can restrict investment in certain areas, it is currently seeking to develop high technology research and development, advanced manufacturing and clean energy technology. Foreigners wanting to invest in projects that include the transfer of technology will be especially well received.

Stumbling Blocks:

Foreign companies wanting to do business in China should expect to face some difficulties, including lack of predictability in the local business environment. China’s legal and regulatory system is known for being inconsistent and laws can be exercised arbitrarily. The lack of effective laws protection intellectual property rights is especially worrisome for many American companies. The government regulates and dictates several sectors of the economy and protects local firms, especially state-owned enterprises, from foreign competition.

Foreign investors too worry about China’s willingness to offer them a level playing field. The current investment climate includes industrial policies that protect and promote state-owned and other domestic firms.

The Chinese legal and regulatory framework allows it to promote investment in specific regions or industries it wants to develop and restrict foreign investment in areas it considers counter national interest or might compete with state-condoned monopolies or other favored domestic firms. Recently, the government let it be known that it will restrict foreign investment in resource-intensive and high-polluting industries, i.e. basic manufacturing. Additionally, it will also discourage FDI in sectors: 1) where it is working to develop domestic firms into global competitors; 2) that are considered state-condoned monopolies; or 3) deemed important for social stability. Finally, it also deters investment intended to profit from currency, real estate, or asset speculation.