CHINESE ECONOMY

Chinese Economy



Chinese Economy

QUESTION 01

As foreign-invested enterprises (FIEs) move into the Chinese economy, and as Chinese enterprises integrate with the global market more than ever before, voices of suspicion have become louder in opposition to FIEs and the preferential policies they have enjoyed in the past. To attract foreign investment, the Chinese government has granted FIEs preferential tax status since the 1980s - a mere 15 percent compared with 35 percent for Chinese enterprise.6 However, a newly-passed Enterprises Income Tax Law eliminated the tax difference between FIEs and Chinese enterprises by instituting a 25 percent tax rate across the board. The rationale behind these preferential policies is the two-gap model theory, which examines how foreign capital has been employed to meet a shortage of domestic resources in an economy. As such, foreign capital should be utilized when a country lacks foreign exchange reserves and domestic capital. However, with the rise of China's economic power, it has accumulated massive amounts of capital. In 2006, China's foreign exchange reserves reached over $1 trillion USD and its gross domestic savings totaled $2 trillion.7 Opponents conclude that China's own capital resources are sufficient to sustain economic growth and thus, foreign capital no longer has the importance it once did in China's development and should be treated accordingly.8 Foreign M&As are the new form of foreign investment in China and are therefore bearing the brunt of this domestic resistance. A second reason against foreign investment, critics argue, is the trend of economic nationalism Chinese companies have experienced as they step onto the global stage. During its first five years in the World Trade Organization (WTO), China has rapidly become dependent on international markets in its domestic economy while its enterprises have also vigorously engaged investment opportunities overseas. The further China moves into the global market, the more economic protectionism and political barriers it encounters in developed countries.9 These circumstances are leading to increasing sanctions for Chinese enterprises investing abroad. CNOOC's failed merger attempt with Unocal is of course the quintessential example of this. It was the political intervention from the United States that buried CNOOC's efforts to acquire the company. Many in China (mainly in academia) complain that while some developed countries strive to pry open foreign markets, domestic constituencies are courting economic nationalism, resisting acquisitions of their own domestic companies by Chinese enterprises - in contradiction to principles of unrestricted free trade within their own borders.

Investing in China seems like the absolute cant miss investment opportunity of the decade if not the century. The stunning economic growth, the rapid industrialisation of the most populous nation on earth, the surging demand for everything from concrete and copper to ships and steel, the container loads of manufactured items making their way to markets throughout the world. How could you NOT make money investing in China ? But is China the saviour for investment portfolios over the next few decades or is it simply another trap for wide-eyed investors fresh from losses in the Asian crisis and ...