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Cost-driven Foreign Investment Turns Way
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In 1980, the Yantian Industrial Development Zone in Dongguan, Guangdong Province formed its first enterprise, Zhengxin Wool Factory. Under the support of Yantian-born Hong Kong and Taiwan businesspeople, 380 foreign-invested companies were introduced in the following 20 years with the zone open to all foreign investors.
However, a clampdown is now on small processing factories with investment of US$100,000 to 200,000, with many already shut down or being sold.

"Considering the short industrial chain, local government has lose interests in foreign processing projects which have little contribution to local employment and cause severe pollution," said Hu Biliang, a researcher with the Chinese Academy of Social Sciences, who just concluded a visit to the development zone.

This is not a Yantian-specific problem, due to limited land resources, many development zones adopt restrictions on incoming industries, and usually favor high-tech and high-competitiveness industries.

Actually, the attitude of China toward foreign investment has already progressed, while foreign investment structures in China are under adjustment. Investments on low-end manufacturing industries now remain in a torpor in coastal areas, and are gradually transferring to Southeast Asia or west China.

According to the statistics released by the Ministry of Commerce on September 15, actual foreign investment dropped 8.49 percent in August compared with the same period last year. It has been lowered for four consecutive months.

Investment changes route

In Yantian Industrial Development Zone, the government's attitude shift is not of fatal impact to foreign investment. Actually, the operational costs in Dongguan City, such as labor, land and energy costs, have driven low-end enterprises out of the market. Some small factories move to China's hinterland like Anhui and Jiangxi provinces, or even abroad to Vietnam and India.

"These factors cause fierce competition in coastal areas. Traditional foreign-funded processing enterprises such as shoe, hat and suitcase makers were accordingly driven out by high value-added and high-tech enterprises," said Hu. So, although the number of foreign-funded enterprises in Yantian Industrial Development Zone is lowering, tax revenue from the zone has not decreased.

Cost-oriented foreign-funded enterprises in other regions are also experiencing hard times. Jin Bosheng, director of Foreign Investment Research Department under the Chinese Academy of International Trade and Economic Cooperation, said that the age of cost-driven foreign investment will end, and the service sector investment will revive foreign investment in China.

His research shows that Chinese exports' price advantages are now waning, but an official of the National Development and Reform Commission pointed out that overseas relocation of low-value foreign-funded enterprises, which scrape by on tax rebates, is a necessary step.

Recently, local governments are clearing some enterprises away to accomplish energy-saving and environment protection targets set by the central government, affecting both domestic and foreign-funded enterprises. For example, the lead-acid accumulator processing trade has been listed on the non-entry directory.

Replacement period

"After small processing factories are shut down, their land will be reused to build hospitals, schools and large projects with advanced technology and abundant capital," Hu Biliang said, adding that proportion of foreign investment in finance, real estate and customs clearance service increases rapidly.

"Several years later, Yantian will be in front of Shenzhen's service sector," he said.

During the past 20 years, foreign processing companies transformed Yantian Town from a rural backwater into a thriving industrial development zone. Now the industrial upgrade will change it into a part of the Pearl-River delta metropolis.

The utilized foreign investment in China has risen from US$11 billion in 1992 to US$60.3 billion in 2005. However, over 70 percent of such investment was injected into industrial sector, and only 20 percent of them poured into service sector.

Reversely, big cities like Beijing and Shanghai have shown rapid growth in service sector investment. Statistics recently released by Beijing Municipal Bureau of Statistics show that over 60 percent foreign investment flew to service sector in the first half year. In Shanghai, the contractual value of foreign investors in the service sector reached US$4.717 billion, up 30.4 percent from last year with a growth rate 28.7 percent higher than the city average.

Jin Bosheng said that because service sector policies have not been started, investment introduction is now in "an adjustment period," but replacement of the manufacturing industries will not last long.

"We might lose the figure in one or two years, but high-quality foreign investment will still remain high growth," he said.

According to the Ministry of Commerce, it has already accelerated policy-making to encourage foreign investment in such sectors like service outsourcing and research center. In the next five years, China will focus on attracting investment in research and development (R&D), financing, logistics, operational headquarters, professional services, after-sale services, international purchasing and transit business.

( by Tang Fuchun, October 3, 2006)

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