Foreign Direct Investment In China. The Times Have Changed. For Good.

China Law Blog's Steve Dickinson recently did a China Economic Review column on China's efforts to move away from being an "export-led" economy. The column is entitled, "No Turning Back," [subscription required] and its thesis is that despite the economic downturn, China's overall macroeconomic plan is still moving forward.

Steve starts out by noting how the recent session of the National People's Congress has made clear that China is not backing down from its plan to move away from export-led growth:

For all the pledges of support for struggling manufacturers, the surprise package of the recent session of the National People’s Congress (NPC) was actually a definitive rejection of the export-led growth model. While China will obviously remain open to foreign commerce, Beijing’s response to the global economic slowdown is to emphasize even more strongly the role of domestic consumption and domestic investment in maintaining growth.

Many foreign observers expected that the pressure to maintain rapid economic expansion would
see the government resurrect policies promoting exports and foreign investment, unwinding recent attempts to move in the opposite direction. In clearly rejecting this approach, Beijing has laid plain its intentions for development.

Presenting the government work report to the NPC delegates, Premier Wen Jiabao reaffirmed the fundamental macroeconomic targets – economic growth, employment and inflation forecasts are virtually identical to those listed by Wen for 2008. The goal is therefore to manage the Chinese economy so that there will be no negative impact from the global economic crisis. Deficit spending, domestic investment and domestic consumption are primary means of achieving this.

This move towards the domestic market is true even for manufacturing:

Even the measures intended to support manufacturing emphasize production for the domestic market. Export production will shift from outsourcing for foreign companies to manufacture of domestically designed products.

Foreign investors interested in China need to account for this shift towards the domestic market and recognize what is still very much open to FDI and what limits it:

It is critical that foreign investors understand this policy shift. To many, it seems inevitable that the economic crisis will push China back to the foreign-directed policies of the previous development model. But the events of the NPC session in March show that Beijing is resolute in its desire for a future driven by the domestic market.

This does not mean the doors will be closed to foreign investment. China will continue to comply with the strict requirements of its WTO commitments. It will remain open to greenfield investments in manufacturing, retail and service businesses. It will continue to improve its intellectual property regime and the efficiency and fairness of its court system.

Certain limitations on foreign investment will remain. M&A as a vehicle for FDI is highly restricted. New tax policies severely limit tax incentives aimed at promoting foreign investment, while a stronger focus on transfer pricing and related issues is designed to increase tax revenue from foreign operations. Direct foreign investment in real estate is difficult; in
high pollution or high energy consumption primary manufacturing it is prohibited; and in low-technology, low-skill, outsourcing oriented manufacturing it is discouraged. Employment law directed at minimum wage, working hours and worker safety continues to be
strictly enforced, raising employment costs.

Foreign companies looking at investment in China must consider the current policy carefully.
Investors who are able to participate in the domestic-led growth policy will have enormous opportunities in 2009 and beyond. Unlike many countries in Asia, China is remarkably open to
foreign investment and participation in these internally oriented projects.

China's National People's Congress has a long and consistent record of setting out China's economic goals and moving the country to fulfill those goals. There is absolutely no reason to think things will be any different this time.