FOREIGN INVESTMENT IN CHINA: PATTERNS AND PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00447R000201670001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 7
• Document Creation Date: December 22, 2016
• Document Release Date: June 8, 2010
• Sequence Number: 1
• Publication Date: May 17, 1985
• Content Type: MEMO

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DIRECTORATE OF INTELLIGENCE
17 May 1985
Foreign Investment in China: Patterns and Prospects
Summary
Since 1979 more than 2,100 joint ventures, cooperative
enterprises, and businesses wholly owned by foreign firms
have been established in China. By the end of 1984 total
paid-in foreign investment in these enterprises had grown to
$3.7 billion, almost 60 percent higher than the yearend
figure for 1983. Nevertheless, the total is far short of
China's needs and we expect Beijing to seek substantially
increased foreign investment over the course of the Seventh
Five-Year Plan (1986-1990). Because China's top priorities
include areas where US firms have a competitive edge--
development of the transportation system, communications
network, and energy supplies--we expect US firms to benefit
substantially from China's drive for modernization.
Recent Developments
Until last year Beijing's progress in attracting foreign investment had been
slow, in large part, because of an uncertain commitment among Chinese leaders
and planners on the extent of incentives that should be offered to foreign
companies. Other obstacles to success included China's inexperience, its need
to develop credibility in relationships with foreign businessmen, its lack of
adequate infrastructure, problems with labor productivity and wages, and the
lack of detailed regulations on taxes and remittances of profits
Beginning in 1983, however, Beijing made a range of concessions in a bid to
gain more foreign participation in modernizing the economy. Scores of new laws
have been released to attract or protect the foreign investor. In September of
This memorandum was prepared by I lof the China Division,. Office of
East Asian Analysis and is based on information through 10 May 1985. . Comments
may be directed to Chief, Development Issues Branc
EA M 85-10101
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that year, China issued regulations to clarify its 1979 Joint Venture law. The
rules offered longer tax holidays, increased opportunities to sell the output of
the venture in the domestic Chinese market, and more decisionmaking autonomy for
the venture. Early last year China introduced new tax rules that exempt joint
ventures from import duties and abolish certain industrial taxes on ventures
that import advanced machinery and technology. In April 1984 the National
People's Congress (NPC) formally ratified Deng's decision to open 14 additional
port cities and Hainan Island to foreign investment, giving entrepreneurs many
of the advantages available in the Special Economic Zones. Since then most of
the new zones have developed extensive laws and regulations to attract foreign
investment.
By the end of last year'Chinese authorities. had granted approval for 930
"equity" and at least 1,100 "contractual" joint ventures.* In addition, there
were 18 cooperative projects for prospecting and exploitation of offshore oil,
and 74 wholly owned foreign enterprises. Total paid-irr foreign investment on
these four forms of direct investment reached approximately $3.0 billion by the
end of 1984.. If licensing agreements, processing arrangements, and compensation
trade are included in the totals, in accord with Chinese practice (as shown in
the tabulation below), total paid-in foreign investment amounted to $3.7 billion
through the end of 1984.
As of this past December, US investors had spent more than $700 million on
joint projects in China. There were 56 equity joint ventures involving about
$150 million, one $10-million cooperative management project, and eight
agreements for joint exploitation of offshore oil into which $550 million have
been sunk. The three largest nonoil Sino-US joint ventures are the Great Wall
Hotel with US participation of $35 million, the Jianguo Hotel with US assets of
* From a Western viewpoint, both forms of joint ventures, as well as joint oil
exploration agreements and wholly owned foreign subsidiaries, would be
considered direct foreign investment. In their definition of foreign
investment, however, the Chinese also include other forms of business
arrangements, such as licensing, processing, and compensation trade
agreements, even though no foreign claims on real assets located in China
exist. The Chinese sometimes use the term "foreign investment" loosely to
refer to all forms of foreign participation, even including foreign loans to
Chinese enterprises. From a Chinese legal viewpoint there are three chief
distinctions between contractual and equity joint ventures. Equity joint
ventures:
-- Fall under the Joint Venture Tax law (a flat 334ercent tax), whereas 25X1
contractual ventures are taxed on a graduated basis under the Foreign
Enterprise Income Tax.
-- Share profits in proportion to equity participation, whereas contractual
joint ventures share profits according to a ratio agreed to in the
contract.
-- Form new legal entities with their own boards of directors, whereas
contractual joint ventures are managed directly by their parent
corporations.
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$11 million, and American Motors' Beijing Jeep Corporation with $16 million in
US assets.
Hong Kong investors accounted for about $2.2 billion of the $3.7 billion
direct investment total. Hong Kong businessmen, however, are not motivated
simply by the desire for profits but also by their desire to establish better
relationships with the Communist Chinese in order to protect their assets in the
post-1997 period. Therefore, to a certain extent, the figures for total direct
foreign investment overstate the willingness of Western entrepreneurs to get
Direct Foreign Investment
in China (a)
(Million US$; yearend)
(Type
Pledged
Paid-in
1981
1982
19 3 - 1984
1982
1983
1984 1
(Total
(Equity Joint Ventures
2,846
88
4,958
141
6,600
340
9,474
1,407
1,769
103
2,345
166
3,726 I
n.a. I
(Contractual Joint Ventures
1,800
2,726
2,900
4,384
530
730
n.a. I
(Joint Oil Exploration
498
999
2,000
n.a.
486
651
1,171 I
(Compensation Trade
460
725
930
n.a.
413
542
n.a.
Other Businesses (b)
...
367
' 420
n.a.
237
254
n.a.
I (a) Data are cumulative stock figures that have been compiled from articles
I in various Chinese economic journals. Data for "paid-in" direct foreign
I investment presumably include foreign cash, material, and technology
I contributions to joint enterprises; however, we do not know whether it also I
I includes loans to such enterprises, i.e., any nonequity contributions. In
the case of compensation trade, where "equity" exists only in the broadest
sense of the word, it is not clear whether the figures include just the
value of the machinery contributed by the foreign partner or the total value
of goods traded under the agreements. China generally uses the accrual I.
basis for accounting, and the above figures probably were derived on that I
basis. I
(b) Includes wholly owned foreign enterprises and licensing agreements. I
1
+------------------------------------------------------------------------------+
Despite the obstacles to foreign investment posed by differences in economic
environments and investment philosophies between China and the West, in the last
year China has succeeded in its efforts to attract foreign investment. At year-
end 1983--the last year for which we have comparable data--foreign investment in
China was on a par with that in South Korea, just slightly below that in Taiwan,
and about one-quarter the level in the other Asian NICs--Hong Kong and
Singapore--and Indonesia (see tabulation below). By the end of 1984, however,
foreign investment in China--led by exploration for offshore oil--had surpassed
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that in both Taiwan and South Korea by a wide margin.
+------------------------------------------------+
Direct Foreign Investment, Paid-In,
for Selected East Asian Countries
(Billion US$, yyearend 198-
China (a) 1.5
South Korea 1.5
Taiwan (b) 1.5-2.0
Indonesia (c) 5.1
Hong Kong (d) 6.0-8.0
Singapore (d) 5.0-7.0
(a) Excluding compensation trade.
(b) Estimated from data on commitments.
(c) Excluding offshore oil.
(d) Estimated from official data on
investment in the manufacturing sector and
from other indicators.
Prospects During the Seventh Five-Year Plan
China's competitive offshore leasing program got under way in 1983 with the
signing of exploration and development contracts with 27 foreign oil companies,
including 10 US firms. Drilling began in 1984 on most of the blocks that are
located in the Yellow and South China Seas. Atlantic Richfield found a
commercially viable natural gas field in its concession south of Hainan Island
and is urging China to use the gas from this field to produce fertilizer on
Hainan. The Japanese have had success exploring in the Bohai and have begun
development of at least one field. Drilling results offshore have been
generally disappointing, however, and the Chinese are now beginning to provide
greater incentives to foreign participation, including opening onshore areas to
foreign exploration and development. By yearend 1984, Japanese, French, and US
firms had spent nearly $1.2 billion on offshore exploration and development.
China expects to sink as much as $20 billion into oil exploration and
development by 1990.
Since last October China has signed joint venture agreements with Western
firms that will ultimately generate about $7 billion in capital imports from the
West (see tabulation below). The giant Daya Bay nuclear power plant deal alone
accounted for nearly half of the total, and transportation related investments
were responsible for another 40 percent. The surge in contract signings is
related to China's economic planning cycle--most contracts for major projects
that are scheduled for start-up during the Seventh Five-Year Plan (1986-1990)
must be signed this year if the projects are to be completed by the end of the
plan.
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The Chinese have stated that they plan to obtain about $50 billion in capital
goods from the West during the course of the plan, perhaps half of which will be
obtained under joint venture and cooperative exploration agreements. They are
currently negotiating several large contracts for nuclear power, coal field
development, steel facilities, and chemical plants. The Chinese have signed
preliminary agreements with foreign investors for development of the Pingshuo
and Jungar open pit coal mines. In mid-1984 they were in the process
arranging financing for these projects and work could begin this year.
In light of China's past aversion to foreign involvement in the economy it is
perhaps surprising that the Chinese appear to view foreign investment more
favorably than foreign debt as a means of financing economic development.
Nevertheless, the Chinese see many advantages in attracting direct foreign
participation. Foremost among them is the hard currency saved as a result of
foreign equity contributions. But the Chinese are also anxious to obtain access
to Western markets, technology, and managerial talent and believe that direct
foreign investment is the best way to gain that access. Moreover, the Chinese
are hopeful that foreign investment will provide new employment opportunities
for the large number of people who enter the workforce annually.
5,
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Remaining Obstacles to Foreign Investment
The greatest hindrance to foreign participation in China's economic
development remains China's unwillingness to adopt Western practices with regard
to the transfer of ownership of assets. The Chinese continue to insist on time
limits to joint ventures, after which capital is turned over to their side. As
a result, Western partners are unwilling to provide state-of-the-art technology
as the expiration date nears. The Chinese, furthermore, have not agreed to
Western guidelines on what consitutes expropriation, nor have they agreed to
"prompt, adequate, and effective" compensation in the event of expropriation.
They also maintain the right to approve of the disposal of assets in the event a
foreign partner becomes bankrupt, severely hampering foreign loans to joint-
venture enterprises. Finally, lacking a convertible currency, the Chinese
invariably insist that joint ventures earn sufficient foreign exchange to cover
their profit remittances.
Most of these issues would be addressed by the bilateral investment treaty
(BIT) proposed by the United States. Unless major changes are made in China's
economic system, however, the Chinese probably will not agree to several of the
provisions. Irrational domestic prices are the greatest barrier to concluding a
BIT. Because China's domestic prices are not in line with world prices, China
cannot grant "national treatment" to foreign firms since this would allow them
to make windfall profits at China's expense.
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CONFIDENTIAL
SUBJECT: Foreign Investiiient in China: Patterns and Prospects
Distribution
Department of Treasury
l - Douglas Mulholland, Special Assistant Secretary for
National Security, Room 4326 (Main Treasury)
1 - Mary Yee, Office of East-West Economic Policy, Room 4426
Central Intelligence Agency
Original - Requestor
1 - Executive Director (7E12)
1 - DDI (7E44)
1 - NIO/EA (7E62)
1 - C/EA/RR (5D10)
1 - C/PES (7F24)
1 - PDB Staff (7F30)
1 - CPAS/ILS (7G50)
5 - CPAS/IMC/CB (7GO7)'
1 - D/OEA (4F18)
1 - Research Director (4G48)
2 - C/China Div (4G32)
1 - C/China/FOR (4G32)
1 - C/China/DEF (4G32)
1 - C/China/DEV (4G32)
1 - C/China/DOM (4G32)
2 - OCR/ISG (11H119)
1 - C/EA/CORR (5D38)
1 - FBIS/NEAD/CE (304 Key Bldg)
1 - C/EA/RR (7E10)
1 - C/DO/PPS (3DO1)
OEA/China/Dev
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