Government boosts regional investment
May 31, 2013 | BY
clpstaffThe NDRC and MOFCOM have updated the Catalogue for guiding regional investment. It shows how China's investment dynamics are changing, with the majority of foreign investment expected to move inland soon
China's coastal regions have benefitted from extensive foreign direct investment (FDI) since the country began to open up. But rising labour costs have caused companies to rethink the location of their bases, especially those engaged in heavy-manufacturing industries.
In order to retain this foreign capital and develop the central and western regions, the government has been pushing investments inland. One way of achieving this goal is through the Catalogue for Foreign Investment in the Dominant Industries of the Central and Western Regions (2013 Revision) (国家发展和改革委员会、商务部中西部地区外商投资优势产业目录 (2013年修订)), which was issued by the National Development and Reform Commission and the Ministry of Commerce on May 9.
“The main purpose of the Catalogue is to develop the local economy of the central and western regions by utilising the funds, technologies, equipment and other resources brought by foreign investors, so as to keep its competitive edge and prevent from foreign investment from moving to the Philippines or Vietnam” said Helen Haixiao Zhang, a partner with Zhong Lun Law Firm in Shanghai.
Industrial and service sectors
The Catalogue places great emphasis on labour intensive industries like manufacturing of digital televisions and energy saving refrigerators. It also considers service industries.
“Labour intensive jobs will bring a large amount of jobs with low requirements in terms of education and professional skills to local communities,” said Patrick Yuan, an associate who also works at Zhong Lun Law Firm in Shanghai.
Traditionally foreign investment has been encouraged in the industrial sector, such as infrastructure and manufacturing. This left a gap in developing service industries, which has lagged behind. “By emphasising the service sector, the government intends to build a more balanced economy,” said Zhang.
One interesting part of the Catalogue is that the manufacturing of whole vehicles is included in the encouraged category. This was downgraded to permitted in the Foreign Investment Industrial Guidance Catalogue (Amended 2011) (外商投资产业指导目录（2011年修订）) because of a surplus of automotive production. However, for the central and western regions, the government wants to use the lucrative automotive industry to attract investment.
|Incentives
Foreign investors will be attracted inland by the preferential treatment offered like tax and land. “Certain manufacturing companies can import machinery and equipment with the value added tax (VAT) refunded or exempted. This can be quite large as the rate is up to 17%,” said David Yu, founding partner of Llinks in Shanghai.
Lower labour costs are also attractive to foreign investors, especially companies who are feeling the rising cost of labour in the coastal areas. Natural resources are also attractive and there are many opportunities for exploitation in western China.
While the lower operating costs and incentives will make investors think twice, issues over infrastructure and provincial government administration are some of the drawbacks.
“Foreign investors may encounter difficulties communicating with the local government agencies because they are usually not as efficient or open-minded as in eastern cities,” said Yuan.
There has been an effort in recent years to improve the administrative process and as investment increases it will further improve. Despite the lack of efficiency, regional governments welcome investment.
|A non-stop trend
“In the future, the central and western regions will keep absorbing foreign investments, because many of the local industries are still waiting to be developed,” said Yuan.
It is also the case that the central and western regions have failed to develop as quickly as the eastern areas. However, this has changed as the GDP growth of some provinces is faster than the growth along the coast and last year Chongqing took the number two spot for FDI in China.
“You can see foreign and even domestic investment is moving to the central and western regions. Part of the reason is incentives and lower costs, but also personal income is increasing as consumers become richer – this makes the market very attractive,” said Yu.
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