For all the pledges of support for struggling manufacturers, the surprise package of the recent session of the National People’s Congress (NPC) was actually a definitive rejection of the export-led growth model. While China will obviously remain open to foreign commerce, Beijing’s response to the global economic slowdown is to emphasize even more strongly the role of domestic consumption and domestic investment in maintaining growth.
Many foreign observers expected that the pressure to maintain rapid economic expansion would see the government resurrect policies promoting exports and foreign investment, unwinding recent attempts to move in the opposite direction. In clearly rejecting this approach, Beijing has laid plain its intentions for development.
Presenting the government work report to the NPC delegates, Premier Wen Jiabao reaffirmed the fundamental macroeconomic targets – economic growth, employment and inflation forecasts are virtually identical to those listed by Wen for 2008. The goal is therefore to manage the Chinese economy so that there will be no negative impact from the global economic crisis. Deficit spending, domestic investment and domestic consumption are primary means of achieving this.
Even the measures intended to support manufacturing emphasize production for the domestic market. Export production will shift from outsourcing for foreign companies to the manufacturing of domestically designed products.
There was virtually nothing in Wen’s report about export trade or foreign direct investment (FDI). This silence is really quite remarkable. China has been the largest recipient of FDI in the world for a number of years. It is estimated that 40% of GDP growth over the past five years has depended on exports. To move away from this dependence to a domestic demand-driven model in a single year is an enormous task. Some may wonder whether the transition will be successful.
However, it appears that the Chinese leadership has concluded that there really is no alternative. In this respect, they are clearly correct. It will be a number of years before the developed world is in a position to provide either markets or capital sufficient to drive growth in China. The country really has no choice but to shift to its own capital and its own markets.
It is critical that foreign investors understand this policy shift. To many, it seems inevitable that the economic crisis will push China back to the foreign-directed policies of the previous development model. But the events of the NPC session in March show that Beijing is resolute in its desire for a future driven by the domestic market.
This does not mean the doors will be closed to foreign investment. China will continue to comply with the strict requirements of its WTO commitments. It will remain open to greenfield investments in manufacturing, retail and service businesses. It will continue to improve its intellectual property regime and the efficiency and fairness of its court system.
Still in place
Certain limitations on foreign investment will remain. M&A as a vehicle for FDI is highly restricted. New tax policies severely limit tax incentives aimed at promoting foreign investment, while a stronger focus on transfer pricing and related issues is designed to increase tax revenue from foreign operations. Direct foreign investment in real estate is difficult; in high-pollution or high-energy-consumption primary manufacturing it is prohibited; and in low-technology, low-skill, outsourcing-oriented manufacturing it is discouraged. Employment law directed at minimum wage, working hours and worker safety continues to be strictly enforced, raising employment costs.
Foreign companies looking at investment in China must consider the current policy carefully. Investors who are able to participate in the domestic-led growth policy recently will have enormous opportunities in 2009 and beyond. Unlike many countries in Asia, China is remarkably open to foreign investment and participation in these internally oriented projects.
Foreign companies waiting for a reemergence of the "good old days," or for a return to promotion of foreign exports and foreign direct investment, however, are heading for disappointment and investment failure.