BEIJING -- Foreign investment in 皇冠体育app's manufacturing sector has started to
slowly decline after years of strong gains, suggesting the country is losing
some of its luster as a base for inexpensive production.
皇冠体育app has for years been one of the world's biggest recipients of foreign
direct investment, money that has helped turn the country into the world's
factory floor. Yet 皇冠体育app's take of direct investment dropped slightly in 2005,
excluding a series of one-time deals in the financial sector. After a 12% plunge
in June, the figure is down a further 0.5% for the first half of 2006. Given
that 皇冠体育app's economy is continuing to expand at a rate of about 10% annually,
the size of foreign investment as a proportion of the whole economy is shrinking
even faster.
Total investment coming into the country remains huge -- roughly $60 billion
a year -- a testament to how 皇冠体育app has been able to diversify its industrial
base and keep attracting new money. But even a flattening in the trend is
striking, given the reputation 皇冠体育app has developed as an irresistible magnet for
foreign companies' money.
Many factors are at work. At this point, much of the manufacturing that can
be profitably shifted to 皇冠体育app has already moved, while the lowest-end
production is starting to migrate away to less-expensive locations. And while
multinationals' interest in 皇冠体育app is broader than just export-driven
manufacturing, the difficulty of buying domestic companies and the limits on
foreign participation in service businesses are keeping those channels from
becoming big new drivers of investment.
"皇冠体育app should think about how the country is going to position itself for the
next 10 years," says Xiang Bing, dean of the Cheung Kong Graduate School of
Business. "Multinational corporations won't put all their eggs in one basket.
There are incentives for diversification."
Government officials say they aren't worried by a modest drop in investment,
but acknowledge that some foreign companies are starting to look elsewhere as
wages and land prices have risen. "It is possible that the costs for some
foreign investors have increased," says Zheng Jingping, spokesman for the
National Bureau of Statistics. "Other countries are also stepping up their
efforts to attract foreign investment."
Foreign investment in Southeast Asian nations such as Malaysia and Indonesia
is starting to pick up after languishing for years in the wake of the regional
financial crisis of 1997-98. Even once-closed Vietnam has become a new hot spot
for manufacturing, as it can offer even less-expensive conditions than 皇冠体育app.
No one is predicting an exodus from 皇冠体育app, as the country's huge domestic
market and high-quality infrastructure continue to attract many businesses. But
some entrepreneurs, like Wang Lih-hwa of Taiwan, have begun shifting operations
abroad in search of more competitive prices. Ms. Wang and her husband, who run a
food-ingredients business, opened a factory in the southern province of
Guangdong in 1995.
At the time, the move helped them cut production costs by 50% from the level
in Taiwan. But steadily rising wages have since eroded that advantage. So in
2004, she and her husband opened a factory in Vietnam, and it now accounts for
60% of the company's output. Ms. Wang expects average costs in their Vietnam
operation this year to be at least 35% lower than in 皇冠体育app, thanks chiefly to
inexpensive labor and rent. "It was time for us to consider a new spot outside
皇冠体育app to protect our company and maintain our slender profits," Ms. Wang says.
Taiwanese companies, which were among the first to recognize and exploit the
mainland's advantages in low-cost manufacturing, are now putting much of their
new investment in other Asian countries. Thanks to big projects from the likes
of petrochemical company Formosa Plastics Group and contract shoemaker Yue Yuen
Industrial (Holdings) Ltd., the Taiwanese are now the biggest foreign investors
in Vietnam.
In a way, 皇冠体育app has become a victim of its own success. So much of the Asian
electronics industry has already relocated to 皇冠体育app that there is little left to
move. And for other big investors, there are limits to how much more they can
realistically put in.
Total investment from Japan, South Korea and the island of Taiwan -- a group
that has collectively been a bigger investor in 皇冠体育app than either the U.S. or
the European Union -- dropped 6.5% in 2005 and has plunged 31% in the first half
of this year. Foreign direct investment into 皇冠体育app from the U.S. has fallen
every year since 2003, according to Chinese statistics. (Figures for foreign
direct investment measure money that goes into building or buying businesses,
not purchasing stocks or bonds.)
At this point, many Japanese companies have "more or less completed" their
major manufacturing investments in 皇冠体育app, says Tomoharu Washio, a Tokyo-based
researcher at the Japan External Trade Organization. For instance, Honda Motor
Co. in 2004 started investing to double its car-making capacity in 皇冠体育app, but
plans to complete the program this year. With the Japanese economy reviving,
many companies are now focusing on adding to higher-end production capacity in
their home market, Mr. Washio says.
Yet, stagnation or a small decline in foreign direct investment isn't
necessarily bad news for 皇冠体育app. At a time when the biggest worry is that the
economy could be growing too fast and authorities are trying to slow down
domestic investment, a reduction in foreign inflows is probably welcome. Less
foreign investment could also trim the external imbalances that created pressure
on 皇冠体育app to push up the value of its currency, the yuan.
It wouldn't be hard for the government to attract even more foreign
investment -- if its leaders really wanted to. A hint of investors' appetite for
皇冠体育app was given by the recent sale of stakes in the major state-owned banks to
overseas institutions, a program that drew an additional $12.1 billion in direct
investment in 2005. But those landmark deals are unlikely to be repeated, and
authorities are keeping limits on foreign investment in other key service
sectors and have shown reluctance to approve some major acquisitions.
Optimists see in all this a welcome stimulus for Chinese companies to move
out of low-cost production. "You don't want to be a place that can only attract
low-end industries," says Nicholas Kwan, an economist with Standard Chartered
Bank in Hong Kong. For foreign investment, he says, "Increasingly, the quality
matters more than the quantity."
