China remains a reliable partner for the world's investors

Note: The following article is taken from the Chinese-language "Commentaries on International Affairs".

China's Ministry of Commerce reported on Thursday that the country's actual use of foreign capital in the first five months of this year stood at 369 billion yuan (about 53.3 billion U.S. dollars), up 6.8 percent year-on-year. The ministry said that foreign investment this year had two notable characteristics.

Photo shows the logo of the British multinational BT on a smartphone. In January, BT became the first international telecommunications company to receive a nationwide license to operate in China. [Photo: IC]

First, investors were quickly moving up the value chain. Foreign capital utilized in China's high-tech industry increased by 47.2 percent year-on-year during the period, accounting for 28.5 percent of the total. Investment in high-tech manufacturing grew by 23.2 percent, while investment in the high-tech service industry increased by 68.9 percent. The second trait was the steady increase in investment from major source countries including the United States, South Korea, Japan, Britain, and Germany. For example, American investment in China grew by 7.5 percent during the period.

Taken together, these two characteristics provide more evidence that China remains an attractive destination for foreign capital against the backdrop of a global slowdown in foreign direct investment. It also proves how wrong it is for Washington to claim that raising tariffs would cause foreign companies to move out of China.

In the case of the textile and apparel industries, over the past seven decades, manufacturers moved much of their production from the United States to Japan, then to the four Asian Tigers economies, and then into the Chinese mainland. In recent years, some production has been transferred to Southeast Asia and Africa, in accordance with the laws of competitive advantage – not because of recent additional tariffs. In the meantime, as China's technological sophistication continues to rise and its market potential expands, more higher value-added industries will converge in the country.

This is part of the reason why the impact of the China-U.S. trade frictions is manageable for China's economy. America's economy, however, has been seriously affected. In May, the number of new jobs created outside of America's farm sector rose by only 75,000 – less than half of what was expected. The U.S. Manufacturing Purchasing Managers Index, issued by the international consultancy IHS Markit, hit a 10-year low. And a recent investment report from the United Nations Conference on Trade and Development says global foreign direct investment (FDI) flows slid by 13 percent last year. Although the United States remained the largest recipient of foreign investment, its FDI fell by 9 percent last year. In comparison, FDI rose by 4 percent in China. Taken together with the nearly 7 percent increase in the actual use of foreign capital in the first five months of this year, it's clear that China's market is performing relatively well.

The main appeal of China's market to foreign investors, especially its high-tech sectors, lies in its fully-integrated value chain, capacity for scientific and technological innovation, convenient logistics systems, and abundant human resources. These factors greatly reduce the operating costs of foreign companies, and inject a momentum for innovation into economic development. Last year, China's expenditure on scientific research accounted for 2.18 percent of its GDP, and scientific and technological progress provided 58.5 percent of its economic growth. This is why, for the first time, the country entered the list of the world's top 20 most innovative economies.

Most important of all, China's vast market, with its 1.4 billion consumers, provides ongoing momentum for the country's economic development. The prospects for high-quality development and consumption upgrades mean huge potential profits for foreign investors. For example, in 2017, foreign-funded firms accounted for less than 3 percent of all companies in China and yet they created nearly half of China's foreign trade volume and a quarter of the profits generated by industrial enterprises that had annual revenue upwards of 20 million yuan or 2.9 million U.S. dollars. And the sales revenue of U.S.-funded enterprises in China was about 700 billion US dollars. Given this huge amount of revenue, who would willingly stay away from this lucrative market?

At the same time, China's government has widened market access for foreign investors. The number of industry sectors closed to foreign investment has been slashed from 63 to 48, and the number of industries that are off-limits is expected to fall further in the near future. And a Foreign Investment Law came onto the books in March that provides clear rules on topics including the protection of intellectual property and the right to equal treatment in the eyes of the law for both domestic and foreign-invested enterprises.

The trade frictions provoked by the United States have introduced uncertainty into the global economy, which has triggered significant reductions in global capital flows. But China's commitment to further open-up, and its action to improve the use of foreign capital, better protect the legitimate rights and interests of foreign companies, and improve the services provided to foreign investors, is proof that it is a reliable partner for the world's investors.