FOREIGN INVESTMENT IN CHINA: IMPACT OF NEW REGULATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000605810001-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 4
• Document Creation Date: December 22, 2016
• Document Release Date: April 6, 2011
• Sequence Number: 1
• Publication Date: March 28, 1986
• Content Type: MEMO

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DATE ,3 j g (. h
DOC NO EA M 3m3d
OCR 3
P&PD I
Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
28 March 1986
Foreign Investment in China: Impact of New Regulations
Summary
Since 1979 more than 5,000 joint ventures, cooperative enterprises,
and businesses wholly owned by foreign firms have been established in
China. By the end of 1985, we estimate that total paid-in foreign
investment in these enterprises reached $5.4 billion. We believe that
through the Seventh Five-Year Plan (1986-90) Beijing will continue to seek
higher levels of foreign investment, although changes in Chinese
regulations may work against small investors. In addition, the drop in oil
prices will probably delay further investment in China's oil industry.
How Much Foreign and US Investment Now?
Foreign investment in China has been growing rapidly over the past five years.
According to China's Ministry of Foreign Economic Relations and Trade (MFERT),
between 1979 and 1985 Chinese authorities granted approval for nearly 2,300 joint
ventures and over 3,700 cooperative enterprises. In addition, there were 30 offshore oil
This memorandum was prepared by I Office of East Asian Analysis.
Information available as of 28 March 1986 was used in its preparation. Comments and
queries are welcome and may be directed to the Chief, China Division, OEA,
25X1
25X1
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exploration and exploitation projects' as well as 1;20 wholly owned foreign enterprises.
According to MFERT, by September 1985 paid-in foreign investment totalled $5.4 billion.
According to US industry sources, total US investment in China as of last
December was about $1 billion, $600 million of that in oil exploration. US firms also are
involved in some 100 joint equity ventures with in+iestments of about $150 million. The
balance of US investment is probably in cooperative enterprises.
Driving Forces Behind Foreign Investment in China
Hong Kong is responsible for roughly two-thirds of all foreign investment in
China and as much as 80 percent of all joint equity, venture projects. Hong Kong
businessmen find China, especially neighboring Guangdong Province, an attractive place
to invest partly because of family ties and other personal linkages. In addition, China
has designed some of its investment incentives--~uch as establishing the Shenzhen
special economic zone adjacent to the Hong Kong, border--specifically to attract Hong
Kong investment. Potential investors, faced with a 3.4-percent unemployment rate that
makes enterprise expansion difficult within Hong Kong itself, find China's labor
costs--one-third lower than Hong Kong's--especially attractive.
China has also improved its investment environment by developing its legal
infrastructure. In 1983, Beijing began to enact scores of laws to attract or protect the
foreign investor. In September of that year, China! issued regulations to clarify its 1979
law governing joint ventures. The new rules offered longer tax holidays, increased
opportunities to sell the output of the venture in tie domestic Chinese market, and gave
more decisionmaking autonomy to the venture. In early 1984, China exempted joint
ventures from import duties and abolished selected taxes on ventures that import
advanced machinery and technology. In April 1984, the National People's Congress
formally ratified the leadership'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. However, the central government has since withdrawn
plans to invest heavily in infrastructure in these areas.
In May 1984, Beijing extended the maximum limit of the term of joint ventures
from 30 to 50 years, giving the foreign investor more time to recoup its investment and
make a profit. In December of that year, China also joined the Paris Convention for the
protection of industrial property rights thereby easing concerns of investors about
pirating protected technologies.
1 We count only 25 offshore contracts total. MFERT may also count areas where bids
have closed but no firm contracts have been signed.
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Last year, Beijing revamped its tariff regulations, lowering duties on raw materials
and high-technology items and gave special tax reductions and exemptions to joint
ventures and projects in Special Economic Zones. The State Council also eased
regulations for high-technology joint ventures giving them more discretion over the
level of their reserves and greater access to domestic markets.
China will continue to try to attract foreign investment throughout the Seventh
Five-Year Plan but with a few modifications. Priority will be given to the development
of natural resources, transport, upgrading existing enterprises, and tourism. Because of
foreign exchange difficulties, however, China has revoked some of the autonomy allowed
local planners. Beijing also is instituting regulations to prevent foreign exchange loss in
certain types of investment. For example, wholly foreign-owned ventures will be
required to export part or all of their product; officials stress that this rule is not
intended to limit foreign investment but to stem foreign exchange loss.
Beijing is also implementing internal regulations designed to limit the share of
borrowed funds that can be used to finance small investments. The rule permits no
debt for any investment less than $3 million; Beijing believes low levels of equity have
been a major cause of bankruptcies. The limitations could undermine plans of small
investors who lacked sufficient financial resources to cover the cost of their venture but
hoped to profit from China's growth in the late 1980s.
Of special interest to the United States over the past few years, investment in oil
exploration probably will slow as long as oil prices remain low. This will adversely
affect the total share of future US investment in China inasmuch as oil represents
two-thirds of all US investment in China and has been the one area where US firms
have been dominant. This, too, is more likely to affect small, independent firms that
have insufficient financial resources to survive until oil prices rise again.
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Typescript "Foreign Investment in China: Import of New Regulations
1 - Mary Yee, Office of East-West Economic Policy, Room 4450, Department of the
Treasury
1 - Joan Plaisted, Office of Chinese Affairs, Room 4318, Department of State
1 - William B. Abnett, Director of China Affairs, USTR, Room 316, 600 17th St., NW,
Washington, DC
1 - Myna Stoltz, Office of East Asia and the Pacific, Room 3820, Department of
Commerce
Central Intelligence Agency
2 - C/OEA/CH
1 - C/OEA/CH/FOR
1 - C/OEA/CH/DEF
1 - C/OEA/CH/DOM
1 - C/OEA/CH/DEV
1 - OEA/Production Officer, 4G-48
1 - D/OEA, 4F-18
1 - DDI, 7E-44
1 - Senior Review Panel, 5G-00
1 - PDB Staff, 7F-30
1 - NIO/EA, 7E-62
1 - C/PES, 7F-24
1 - FBIS/NEAAD/China Branch, 306 Key
1 - C/EA/0 5E-18
1 - CPAS/ILS, 7G-50
5 - CPAS/IMC/CB, 7G-07
1 - Author
1 - Chrono
OEA/CH/DE~ ~27Mar86
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