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Recently, preferential policies for foreign companies and foreigners have weakened, causing foreign investors to worry about China’s opening-up prospects. For example, starting from 2022, foreigners will no longer enjoy housing subsidies and tax-free concessions for children’s education, and the cost of family living will rise. Moreover, China’s prevention and control of the new crown epidemic has not been relaxed, and the immigration isolation policy remains unchanged, which has made it difficult for foreign employees to reunite with their families. In addition, the intensive introduction of regulatory measures in the past two years has also aggravated the concerns of foreign investors. How to interpret the policies has become the biggest challenge, which affects how foreign investors view the Chinese market and plan long-term investment. However, we believe that the recent loss of foreign employees is temporary, and the inflow of international talents will continue to grow at a high speed in the future, which is determined by China’s economic growth prospects. Statistics show that foreign capital has not left China after the epidemic. China’s policy of opening up its domestic market has not changed.
Why invest in China?
China’s main attraction to foreign investment comes from its strong economic performance. This year’s actual GDP growth rate exceeded the official target of “over 6%” without any suspense. We expect that the annual GDP growth rate is likely to exceed 8%. As of the third quarter of this year, China’s GDP has increased by 16% over the same period in 2019. This is in sharp contrast with other economies in the world. With the exception of the United States, almost all countries’ GDP is shrinking: the EU’s GDP is 2% lower than in 2019, and Japan’s is 4% lower. Therefore, the macroeconomic environment is beneficial to China.
Concerns about future economic growth mainly come from the deceleration of real estate. Affected by the two major policies of deleveraging and real estate tax, it is expected that both commercial housing investment and housing prices will decline in the future. Real estate has been the economic engine of China over the past 20 years. It has not only become the largest asset of Chinese residents, but also the fundamental source of land revenue for local governments. Current policies focus on controlling financial risks, and it is difficult to change the deleveraging policy of the real estate industry. Therefore, future economic growth must rely on other industries. Part of the construction of commercial housing will be replaced by government-supported affordable housing and low-rent housing, which will partially offset the impact of the slowdown in real estate in big cities. Nationwide, there is little room for commercial real estate to increase, but the commercial real estate in core cities will still grow with the accumulation of industries and population. At the same time, real estate in many small and medium-sized cities will shrink.
Manufacturing investment will also partially offset the impact of the real estate slowdown. At present, the manufacturing industry is in the rising phase of the business cycle, and this rising period usually lasts for 5-7 years. Energy transition and technological upgrading have brought new investment and demand. Due to China’s strict border management, the possibility of repeated epidemics is very small, ensuring the stability of the industrial chain. After the epidemic, China’s economy and trade have not decoupled from the world, but have become closer. This is inseparable from China’s strict epidemic prevention policy.
The intensive introduction of regulatory measures this year has hit platform companies and impacted overseas-listed technology companies. Foreign investment in related industries has suffered losses and worries about future policy trends. But we need to realize that the annihilation of education platforms is an exception, and strong supervision has not hit the broader digital economy. Platforms including e-commerce, logistics and life services are still expanding. Although the stock prices of large Internet companies have been affected, buyers and sellers on the platform have benefited from antitrust. The impact of the digital economy on China is mostly indirect. Automation, 5G, Internet of Things, digital management, mobile payment, Internet finance, etc. improve industry productivity and drive growth from all dimensions. Regulations and data privacy-related laws are introduced to eliminate gray areas, and it does not mean that policies no longer support the digital economy. Moreover, the impact of platform companies on China’s overall economy is very limited. According to the “2021 China Top 500 Private Enterprises Survey and Analysis Report” released by the Ministry of Economic Affairs of the All-China Federation of Industry and Commerce in September, there are only 11 Internet companies, accounting for only 7% of the top 500 companies’ total revenue and 0.1% of China’s GDP.
For a long time after the epidemic, people have been discussing the removal of the industrial chain from China, but this has not happened, and China has not decoupled from the world in terms of trade or investment. In fact, foreign capital’s interest in China has increased instead of falling. In 2020, global foreign direct investment (FDI) will decline, but China’s FDI will continue to grow. In 2020, investment inflows into China exceeded one-fifth of the world’s total FDI and doubled the share before the epidemic. This trend continues this year.
From a policy point of view, China is increasing its efforts to attract investment from foreign entities and financial openness. The negative list of real economy investment is an indicator to measure the degree of openness of a country. Since 2017, China has shortened the negative list of foreign investment access year after year. Except for a few fields such as the military industry, foreign investment is almost distributed in all industrial and service sectors in China. Cross-border capital inflows in the securities market are also accelerating. International financial institutions have gradually included Chinese securities in global indexes, which directly drove capital inflows, because overseas asset management companies tracking indexes to make passive allocation is the most important investment method. The recent liberalization policy has resulted in a substantial increase in the number of majority-owned and wholly foreign-owned financial institutions operating in China. This includes joint venture wealth management companies controlled by foreign investors (such as Schroder Bank of Communications Wealth Management), wholly foreign-owned futures companies (such as JPMorgan Chase Futures), and wholly foreign-owned public funds (Fidelity). JPMorgan Chase Securities and Goldman Sachs Gao Hua are expected to become China’s top two foreign-owned securities firms.
National treatment of foreign capital
From 1994 to 2008, the pull of foreign capital on China’s economy was obvious. The proportion of foreign capital in my country’s capital formation reached a peak of 15% in 1994, and then gradually declined, reaching only 2.3% by 2020. In 2016, China’s foreign investment exceeded FDI for the first time. In certain industries, foreign companies continue to maintain their advantages, such as asset management, high-end manufacturing, and luxury goods. However, in mass consumer goods, industrial intermediate goods and e-commerce, Chinese companies have increasingly obvious advantages. In recent years, the treatment of foreign companies has begun to be inferior to that of top domestic companies. Many talents who have worked in foreign companies have returned to private companies and even state-owned companies, bringing management experience.
With the decline in the contribution of foreign capital to the economy, it is inevitable to rethink the issue of national treatment of foreign-funded enterprises and the relationship between foreign capital and domestic capital. China used to give foreign companies a number of preferential treatments in taxation, land and talent introduction, including corporate income tax deductions, income tax rebates for profit reinvestment, individual tax deductions for foreign talents, and tax exemptions for children’s education expenses. However, starting in 2008, China abolished the income tax concessions for foreign companies, and no longer distinguished between foreign and domestic capital in terms of corporate tax. However, after the abolition of the preferential treatment, the speed of foreign capital inflows did not go down as many people feared, but instead increased even more. China has become the most important factory in the world, and the world’s top 500 companies have entered China to establish production lines.
Foreign investment is still vital to China’s development. The advanced technology of foreign-funded enterprises poses a threat to domestic-funded enterprises of the same type, but it also encourages technological innovation. For example, Apple and Tesla have restrained the scale of domestic mobile phone and electric vehicle companies to a certain extent, but they have also promoted technological innovation through demonstration effects. At the same time, foreign companies purchasing large amounts of supporting parts in China will promote the technological iteration of the upstream and downstream industry chains and cultivate leading companies with international competitiveness, such as Lens Technology and CATL. Attracting foreign investment into China will enhance China’s overall technological strength.
In the past, foreign capital entered China for cheap land and labor for export processing trade, but now it is for the Chinese market. This means a change in the way foreign companies invest in China. Since the ultimate goal is to serve Chinese consumers and manufacturers, foreign investment plans in China will be more long-term, and they will be more willing to transfer technology from parent companies to subsidiaries, or even from subsidiaries to domestic partners. In recent years, more and more multinational companies have established R&D centers in China because of the large capacity of China’s domestic market, which makes it easy to share R&D costs. After the epidemic is over, the global industrial chain will enter a new round of adjustment period. Some foreign-funded production lines will return to their home countries or be dispersed to other industrial countries to avoid the risk of excessive reliance on China. But there will also be more foreign companies entering China to serve domestic consumers and companies.
(This article only represents the author’s own views. Xu Yuqian, an assistant researcher at Hang Seng China, also contributed to this article. Editor in charge: Yan [email protected])