China's investment climate hasn't deteriorated and promoting indigenous innovation is justified.

The author of the article is chairman and president of Export-Import Bank of China.

Recently, some government officials, companies and the media in the US and Europe expressed concerns over the procurement and indigenous innovation policies of China, and thereby alleged that China's investment climate had deteriorated. Indigenous innovation became another hot topic, next only to the RMB exchange rate in China's economic relations with foreign countries.

Has China's investment climate indeed deteriorated?

As early as in February 2006, the Chinese government published its indigenous innovation policy in the National Medium- and Long-term Program Outlines for Science and Technology Development(2006-2020). Government procurement is not a new concept in China. Why haven't concerns from major developed countries surfaced until recently? Facts and statistics have proved that China set up no barriers to foreign companies.

In the definition of indigenous innovation products, all products manufactured by foreign companies in China are labeled as "Made in China." In 2009, 55% of the government's procurement contracts for mechanical and electronic products were given to foreign companies. In the same year, despite the fact that global foreign direct investment (FDI) plunged by 40%, the FDI to China dropped only by 2.6% thanks to China's lowered foreign investment threshold and more open policies. However, criticism from the West never faded away. There must be some more profound reasons behind these complaints.

1．Has China;s investment climate really deteriorated?

The accusations from foreign media, companies and government officials were based on surveys on China's business climate and confidence conducted by the American Chamber of Commerce in China (Amcham-China) and the European Chamber of Commerce (EUCCC), the 2010 White Paper or Policy Recommendations drawn from the above surveys, and Doing Business 2010 by the International Finance Corporation (IFC), a member of the World Bank Group. What did they say about China"s investment climate?

The surveys conducted by Amcham-China and EUCCC revealed that: first, this "once-in-a-century" financial crisis caused a large-scale economic contraction in America, Europe and Japan, whereas 70% to 80% of American and European companies in China still managed to make a profit. Over two-thirds of the surveyed reported profits equivalent to or higher than the global average.

Second, most companies were not only optimistic, but also planned to increase their investment in China.

Third, 70% of foreign companies aimed to supply the Chinese market, while only 12% targeted the US market. These survey results are of essential significance to the Sino-US trade and re-balancing the international financial market in the post-crisis era.

Fourth, the biggest challenge or risk facing American and European companies in China is not tightened policies and regulations. Compared with insufficient IPR protection, China's economic slowdown, thirst for qualified management talents, difficulties in law enforcement and the rising labor costs are more serious problems.

 

Surveys on China’s Business Climate in 2010, By Amcham-China and EUCCC

	Amcham-China	EUCCC
	(percentage of the companies surveyed)	(percentage of the companies surveyed)
Investment in China
Profit-making	71	77 2
Profit margin equivalent to or above the global average	76	66
Optimistic about the future	82	78
Planning to increase investment	79	68 3
Aiming to supply the Chinese market	72 1	76 4

Data source: Amcham-China 2010 Business Climate Survey and Innovation Policy Survey Analysis, and EUCCC Business Confidence Survey 2010.
1 Companies with production base in China (58%) and those supplying the Chinese market with imports (14%).
2 Including companies with break-even performance (18%).
3 Including companies considering China as their first investment destination (21%) and the rest 47% taking China as one of the top three investment destinations.
4 Companies taking sales increase in China as their primary strategy to expand profit.

 

Those surveys didn't directly raise the question of whether the country's investment and business climate had worsened. However, it should be noted that such a question was directly asked in a survey conducted and published by the American Chamber of Commerce in Shanghai (which has more members than the American Chamber of Commerce in Beijing), although hardly any Western media reported it.

According to this survey, 78% of the respondents thought China's business climate had improved (45%) or remained unchanged (33%). The percentages were much higher than the 22% who held that China's business climate had deteriorated. Ninety percent of the surveyed companies reported a stable or improved performance in China.