Mon, Aug 01, 2005 - Page 8 News List

The allure of China is fading for businesses

By Chang Hsi-mo 張錫模

The Asian economic system is now quietly undergoing an important transformation, which we can call the "transcendence of the China market." The Chinese government has gone all out to stop this by distorting economic information, even as the US has taken strategic action to boost the trend.

The flood of investment into China has slowed and many international companies have adopted a "China-plus-one" investment strategy.

Given the risk of investing in China revealed by the SARS pandemic in 2003, foreign investors from advanced nations have carried out a "China-plus-one" policy of locating their production facilities and operating headquarters in Asian nations other than China. The "China-plus-one" policy means a company should invest not only in China but also one other place. It has stimulated a fad, with foreign textile companies having sought to invest their capital in Bangladesh, Vietnam and Myanmar.

As the "China-plus-one" trend continues, it is inevitably causing foreign investment in China to slow down. According to statistics published by the Chinese government, foreign direct investment in China in the first five months of this year decreased by 0.8 percent compared with the same period last year, the first negative growth of foreign capital inflows since September 2000.

The above figure is a conservative estimate by Chinese government officials. In fact, the Chinese government deliberately made "arbitrary changes" in last year's statistical data in order to camouflage decreased foreign investment. For example, it changed the figure for March last year of US$5.75 billion of foreign direct investment from abroad to US$4.87 billion, and the April last year figure of US$5.55 billion to US$4.86 billion.

By offsetting statistical values, the Chinese government was able to claim that inward direct investment increased by 10.7 percent in January, compared to the same month last year, as well as a 5.7 percent increase in February, an 11.4 percent rise in March and a 16 percent decline in April. In short, China has lowered its baseline values to show a significant increase of foreign capital inflows.

It is hardly surprising to see the Chinese government distort information. For many years, the illusion of an "economic miracle" in China has attracted foreign investors. It conjures up an image of a Chinese economy that will undergo indefinite linear growth unaffected by regular business cycles, and that foreign investors have no choice but to invest there to maintain their competitiveness.

Despite China's propaganda ploy, it has not been able to stop the decline of foreign direct investment this year. The downturn of foreign investment clearly indicates a low evaluation of the Chinese economy by international enterprises.

Some commentators have said that Washington is improving ties with India as a way to contain China. But, the actual impact is more economic than military. Now that the US has better relations with India and worse relations with China, it will be necessary for the directors of multinational firms to include India in their strategy reports.

In sum, this is the end of China's monopoly of almost all foreign investment capital. India will soon replace it by attracting more and more foreign investors. Besides other countries such as Vietnam, where the average wage is half that in China, Indonesia, where it is under 40 percent, and Bangladesh, Myanmar and Cambodia, where it is around 30 percent, are all attracting more investment. The Chinese government understands the strategic implications of these developments. It is essential that Taiwan also take note.

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