Is China’s Investment Environment Deteriorating?

Famous Chinese entrepreneur Cao Dewang has invested in the U.S. Is China’s burden of taxation among the highest in the world? Many foreign enterprises, including Japanese ones, have withdrawn from China. Rumor has it that China’s investment environment is deteriorating. Detailed analysis of the statistics in the Report on the Work of the Government will show us whether China’s investment environment has deteriorated.

First, China’s rank on foreign investment and its business environment has soared. Statistics show that China has been second only to the U.S. in terms of inbound and outbound investments for many years in a row. In the last decade, foreign investment in China saw a steady increase year on year. In 2008, China attracted US$92.3 billion of foreign investment, a growth rate of 23.6 percent. In 2015, China attracted US$126.3 billion, a 36.8-percent growth from 2008.

According to statistics, over the past decade, China’s rank in attracting foreign investment has been increasing. In 2015, China attracted US$126.3 billion of foreign investment, a year-on-year increase of 5.6 percent. As China’s economy grows and its upgrading speeds up, Chinese enterprises are accelerating the pace of their expansions abroad, with increasing investment overseas, including greenfield investment, acquisitions and mergers, most of which are taking place in the U.S. and Europe. In 2016, China’s investment abroad reached an unprecedented volume of US$170.1 billion, a year-on-year growth of 41 percent. The growth rate of investment abroad in 2008 reached 68.5 percent, the highest in nearly ten years. China has become more and more attractive for foreign investment. Meanwhile, an increasing volume of investment has been made overseas.

Moreover, the rank of China’s business environment has also been climbing for many years in a row, and it is among the best in the major economies, which proves that China is really attractive to foreign investment. Foreign investors view a potential destination for investment in a comprehensive manner. Cost is not the only thing that is taken into consideration. Business environment and dimensions of the market, as well as its own strategy and its position in the chains of industry, supply and value, are all factors that a foreign investor considers when choosing its investment destinations. China’s enormous market and complete industry chains make the country a place that no transnational investors can ignore.

Second, China’s massive tax cuts last year ranked top in the world. In 2016, a pilot program for value-added tax (VAT) to replace business tax was advanced across the board, resulting in companies making total tax savings of 570 billion yuan. The program not only helps to reduce companies’ tax burdens, but also supports a refined industrial division and the upgrading of the industrial structure. In 2017, China plans to cut taxes by another 350 billion yuan. Main tasks of the Chinese government include lowering corporate costs and improving weak links to deepen supply-side structural reform. The Report on the Work of the Government clearly pointed out that China will further reduce tax burdens on enterprises by around 350 billion yuan and remove other corporate-related fees by around 200 billion yuan. This year’s goal carries huge implications and will bring actual benefits for market entities, including foreign companies in China.

According to the latest statistics on China’s macro taxation, the debt rate of the central and local governments is only 36.7 percent. That number is not only far below the rate of Western countries, but is also among the lowest rates of all major economies.

Moreover, the Report on the Work of the Government stressed that governments at all levels should continue to cut fiscal expenditure. The central government departments should take the lead by reducing no less than 5 percent of regular expenditure, and are not allowed to increase the consumption of public funds on three governmental activities—official vehicles, official hospitality and expenditure on overseas visits. More funds should be used for cutting taxes, so as to cut down annual expenditure in order to enrich the people.

Third, China will deepen its reform and opening up and enhance the developmental vitality of enterprises. Efforts will be made to further streamline administration and delegate more powers, in order to provide a better environment for enterprises. This year, the Report on the Work of the Government stated that China will continue to comprehensively deepen reforms, and launch a number of landmark reform initiatives. To balance the government-market relationship, the pivotal issue in economic structural reform, China will continue reforms to streamline administration, delegate more powers, and improve regulation and services.

In 2016, this administration’s goal of cutting the number of items requiring government review by a third was achieved ahead of schedule. On that basis, the government cancelled the requirement for a further 165 items for review by State Council departments and authorized local governments in 2016. It also overhauled and standardized 192 items of intermediary services for government review as well as 220 items of approvals and accreditations for professional qualifications. 

This year, the Report on the Work of the Government stated that China will continue to transform government functions. In order to enable the market to play the decisive role in resource allocation and to give better play to the role of government, China must deepen reform to streamline government administration, delegate more powers, and improve regulation and services. This is a profound reform of government itself, which China need to continue to pursue with the courage to make painful self-adjustments and overcome all odds. China will fully implement a list-based management system, formulate lists of the powers and responsibilities of the departments under the State Council, and expand the piloting of granting market access on the basis of a negative list.

Fourth, three key points are stressed. In the Report on the Work of the Government, Premier Li Keqiang firmly put forward three key points to energize those outside the public sector: all industries and sectors for which entry is not explicitly prohibited by laws or regulations should be open to different types of market entities; all industries and sectors that are open to overseas investment should be open to Chinese private capital; and all unjustified activities that impede fair market competition should be stopped. In fact, this is a firm statement raised by the government in order to further implement policies and measures to support the development of non-public sectors of the economy. Moreover, the Report on the Work of the Government also pointed out that we will move faster to develop a new government-business relationship. The Report stated that China will ensure equal rights, equal opportunities, and fair rules, and further expand market access for the non-public sector.

Fifth, China is promoting the Belt and Road Initiative to build an international community of shared destiny. To achieve the goal, China is working with more than 100 countries, following the principles of wide consultations, joint contributions and shared benefits, to strengthen the infrastructure construction and international industrial capacity cooperation, improve the level of industrialization, achieve connectivity with global economies and enhance the industrialization of underdeveloped countries. In the internet era, as an inevitable result of the international division of labor, industrial chains, value chains and supply chains are distributed worldwide and international economic and trade cooperation is drawing increasingly close. Thus, the global distribution of enterprises is also inevitable.

This year’s Report on the Work of the Government pointed out that in the process of promoting the Belt and Road Initiative, China will place more focus on building economic corridors and maritime cooperation hubs, as well as strengthening international industrial capacity cooperation and cooperation in education, culture and tourism with other countries along the routes. Thus, both foreign and domestic firms can make their own independent choices to invest in low-cost countries, like those of Southeast Asia.

Nowadays, as anti-globalization and trade protectionism have sprung up, the Belt and Road Initiative places more focus on globalization and two-way investment, and is committed to making full use of the markets and resources both in China and abroad to jointly develop the international market. It’s also a real embodiment of a community of common destiny, common responsibility and common interests. In addition, by improving the positions of countries involved in global industrial chains and giving full play to their advantages, the Belt and Road Initiative is to promote economic connectivity, advance the well-being of people of all countries, and finally achieve the goal of common prosperity.

The author is a research fellow from Chongyang Institute for Financial Studies, Renmin University of China.