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Investment Climate - Openness to Foreign Investment


China attracted almost USD 106 billion in foreign direct investment (FDI) in 2010, second only to the United States. China's sustained high economic growth rate and the expansion of its domestic market help explain its attractiveness as an FDI destination. However, foreign investors often temper their optimism of potential investment returns with uncertainty about China's willingness to offer a level playing field to foreign investors in the long term. In addition, foreign investors face a range of difficulties related to China's current investment climate. These include a lack of transparency, weak intellectual property rights (IPR) protection, corruption, industrial policies that protect and promote local firms, and an unreliable legal system. 

China has a legal and regulatory framework granting it the authority to promote investment in specific regions or industries it wishes to develop and to restrict foreign investment deemed not to be in its national interest or that might compete with state condoned monopolies. Many regulations contain undefined key terms and standards and are applied in an inconsistent manner. Potential investment restrictions are much broader than those of many developed countries, including the United States.

Investment Policies 

The Chinese government has stated that it welcomes foreign investment. In particular, China seeks to promote investment in higher value-added sectors, including high technology research and development, advanced manufacturing, clean energy technology, and select modern services sectors. Export-oriented investments also often receive government support. A major goal of China's investment policies is to encourage the domestic development of technological innovation and know-how. Investment projects that involve the transfer of technology or the potential for "indigenous innovation" tend to be favorably received by China's investment authorities. Foreign investors have said they must often weigh China's market potential and its interest in attracting technology against China's inability or unwillingness to protect investors' intellectual property. 

China has indicated that it will consider restricting foreign investment in resource intensive and highly-polluting industries, citing basic manufacturing as an example. In addition, China appears to discourage foreign investments in sectors: 1) where China seeks to develop domestic firms into globally competitive multinational corporations; 2) that have benefited historically from state-authorized monopolies or from a legacy of state investment; or 3) deemed key to social stability. It also discourages investments that are intended to profit from currency, real estate, or asset speculation. 

China seeks to spread the benefits of foreign investment beyond its relatively wealthy coastal areas by encouraging foreign companies to establish regional headquarters and operations in Central, Western, and Northeastern China. China publishes and regularly revises a Catalogue of Priority Industries for Foreign Investment in the Central-Western Regions, which outlines incentives to attract investment in targeted sectors to those parts of China.

Five-Year Plan

China defines its broad economic goals through five-year macro-economic plans. The most significant of these for foreign investors is China's Five-Year Plan on Foreign Capital Utilization. The most recent version was released in November 2006 and promised greater scrutiny of foreign investment projects. The plan called on China to: 1) realize a "fundamental shift" from quantity to quality in foreign investment by 2010; 2) focus on introducing advanced technology, management expertise and talent; 3) pay attention to the environment and energy efficiency when evaluating investments for government approval; 4) restrict foreigners' acquisition of "dragon head" enterprises (i.e., premier Chinese firms); 5) prevent the "emergence or expansion of foreign capital monopolies;" 6) protect "national economic security," particularly "industrial security;" and 7) prevent the "abuse of intellectual property rights protection not favorable to the indigenous innovation of Chinese enterprises." The next plan is expected to be released in 2011. 
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