Open the gate wider but raise the bar too

Updated: 2014-08-15 05:50

By Cecily Liu and Zhang Chunyan(China Daily Europe)

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Chinese economy needs more high-end, foreign investors, Expert says

A British expert on Chinese international relations says foreign direct investment into the country since it started opening up in the 1980s has failed to play as significant a part as the Chinese government had hoped in the upgrading of its domestic industries.

Professor Sean Breslin, director of the Centre for the Study of Globalization and Regionalization at the University of Warwick's department of politics and international studies, says as the Chinese economy continues its structural shift to more consumption-led growth, foreign investment into the country could have allowed a lot more local skills and technology transfer than it has.

 Open the gate wider but raise the bar too

Sean Breslin, director of the Centre for the Study of Globalization and Regionalization, says foreign investment in China could have allowed a lot more local skills and technology transfer than it has. Zhang Chunyan / China Daily

Breslin says the Chinese government must now open up its market wider to more foreign investment, and if it does so, it would increase its bargaining power to encourage more overseas companies to bring their skills and technology into the economy, which would in turn create many more jobs and raise skill levels.

After studying in China in 1984, Breslin has spent the past 30 years researching the politics, political economy, and international relations of contemporary China.

He is now an associate fellow at Chatham House, the Royal Institute of International Affairs, an independent policy institute in London

He is also author of the 2007 book China and the Global Political Economy and many papers on the Chinese economy and its relationships around the world.

One of the biggest mistakes that many still make about China is to equate its GDP growth to its economic power, he says.

He argues that this is misguided because GDP growth very often includes the output value of foreign investors, but that the benefits gained by those companies are often not transferred to a host country.

Open the gate wider but raise the bar too

FDI in China has failed to result in the higher levels of industrial modernization and upgrade that some suggest, he says.

As a result, before the most recent shift to a more consumption-based economy, the government had little bargaining power with the foreign companies that had invested here, as many have simply arrived and set up cheap production and export operations, he says.

Breslin is confident the situation will gradually improve, but adds the "crucial thing is to distinguish clearly between two kinds of investment" - those aimed at the Chinese market, and those that use cheap Chinese labor to produce export goods.

"If foreign investors want to access the Chinese market, they should be made to introduce new skills, technologies and standards to China. For some sectors, that has happened, but certainly not for the export sector."

Foreign companies would bring more skills and technology to Chinese if stricter government regulations insisted they do so, he says.

But this does not work on foreign investments aimed at exports, because instead that would simply drive investors to lower cost markets.

It is a trade-off the Chinese government must be prepared to accept, lower amounts of growth, but at a higher quality, he says.

There are hard lessons to be learned from past high-quality, technology investments into China, he says.

The Taiwan-based multinational manufacturer Foxconn, considered the world's largest electronics contractor and manufacturer whose clients include major American, European, and Japanese electronics and information technology companies, for instance, attracted some unwelcome attention when it invested in major high-tech operations.

Its labor practices came under hefty global scrutiny when 13 employees committed suicide at its Chinese plants in 2010, and then three years later when it admitted student interns had been working shifts that were in violation of its company policies.

Breslin says Foxconn should certainly have implemented more acceptable corporate social responsibility measures, but that the conditions of its investment were muddied by the fact the company was both a hi-tech mass producer, and an exporter.

Breslin says one reason for labor law violations by major investors still happen in China is the country's speed of growth, meaning the enforcement of rules and practices is sometimes ignored.

He hopes the shift in economic focus away from cheaper exports toward domestic consumption has started to address that particular issue, but it is difficult to convince some international investors to go to China, even with the effects of Chinese currency appreciation and a reduction in export tax.

However, what is now working in China's favor, as it attempts to raise the standard of its manufacturing base, is that its supply chain is becoming more sophisticated, manned with a better qualified and educated workforce - the direct result of increased government spending on training of industrial technicians, researchers and designers, for instance.

The fact the country not only weathered the 2008 financial storms better than many of its competitors, too, means its global economic power has grown, Breslin says.

"China started developing its overseas financial power before the financial crisis, but it really took off after then, and that's been a real game changer for the country."

China's careful investments into other developing countries, particularly in Latin America and Africa, have also allowed those economies to recover significantly quickly, while its acceleration of investment in troubled Europe - including significant sums in European debt - encouraging countries there to address their sovereign debt crisis, and help avoid the world going back into recession.

According to a report from the Rhodium Group, the New York-based consultancy, China's annual investment in Europe tripled from 2006 to 2009, and tripled again to $10 billion (7.7 billion euros) in 2011.

The number of deals with a value of more than $1 million doubled from less than 50 in 2010 to almost 100 in 2011.

The report adds that Europe can expect new Chinese investment of about $250 billion to $500 billion by 2020, if it continues to attract investments at the current pace.

Breslin says China's growing power on the international economic stage was no better illustrated than in October 2011, when Klaus Regling, the chief executive of the European Financial Stability Facility, the continent's bailout fund, traveled to Beijing, just a day after eurozone leaders had agreed to leverage the 440 billion euros EFSF to 1 trillion euros.

At the time Europe had reportedly been toying with the idea of asking China and other emerging economies to help, possibly by investing in the rescue fund.

That gave such a powerful message to the world, Breslin says, that almost everything that might have been said about China's global political influence before the financial crisis became irrelevant.

But those conversations should start again, he says.

Breslin says China's new financial power is the direct result of its own outward investments, and that they have reshaped the global political economy, particularly in relation to US hegemony.

This has huge implications for emerging economies, he says, such as those in Africa where inward investments can lack the regulatory comfort of some Western democracies.

China's increasing investment in other parts of the world including East Asia, the former Soviet Union, Latin America, Africa and the Middle East, are also creating new and stronger political ties for the country, he says.

Back in Europe, Breslin thinks China's investments are already proving beneficial for all concerned.

Europe has now become the world's largest recipient of foreign investment by Chinese firms, allowing China to step up its own international reach, while at the same time injecting funds that are being welcome on a continent plagued by recession and in desperate need of hard cash.

Breslin says their increasingly tight business relationship is strengthened by closer government-level relations, in contrast to growing political tensions being experienced by some Chinese companies in other markets.

Chinese telecommunications companies Huawei and ZTE, for example, have both encountered restrictions in markets like the US and Australia, but have found Europe to be completely open to them.

"China isn't seen so much as a threat to Europe, maybe because in Europe we're more realistic about our place in the world," he says.

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(China Daily European Weekly 08/15/2014 page32)