Invest in China

According to the World Bank, China's GDP now ranks as the fourth largest in the world, slightly ahead of the UK.

In 2004, China's GDP surpassed that of Italy for the first time in history, making China the sixth-largest economy in the world. China's GDP in 2005 reached US$2.26 trillion, US$94 million more than that of the United Kingdom, thus making China the world's fourth-largest economy by notional GDP and second-largest in terms of purchasing power parity (PPP) GDP. In 2006 the National Bureau of Statistics of China reported that industrial profits in China grew 30.1%, and the profit of state-owned and state-controlled enterprises (SOEs) soared 22.0% year-on-year. However, as a nation of 1.3 billion people, China is ranked approximately 100 out of 200 in terms of per-capita GDP.

Investment climate

China's economic growth from 1978 to the present, to the extent that it is credible, is simply unsurpassed in human history. China's potential 1.3 billion customers have held an allure like no other. In mid-2006, China’s National Development and Reform Commission announced that it plans to gradually relax restrictions on foreign holdings of domestic enterprises. However, its plan stated that foreign capital should be directed toward high-tech, modern service industries and infrastructure development with environmental protection. China hopes to increase Foreign Direct Investment (FDI) which, after accounting for Chinese capital routed offshore to take advantage of offshore tax preferences, has declined slightly since 2004. 

Foreign direct investment (FDI) flows

In 2006, China has maintained its position as one of the world’s top places for foreign direct investment (FDI). As a matter of fact, Foreign-invested Enterprises (FIEs) play the significant roles in China’s economy, about accounting for 27 percent of value-added production and over 58 percent of foreign trade. In 2006, the United States was China’s fifth largest source of FDI. Overall foreign direct investment (FDI) inflows from the world to China dropped by 4 percent in 2006, though non-financial FDI increased 4.5 percent. However, the inflow decline of 4 percent in 2006 should not be interpreted to suggest that foreign investors are losing their interest in China. Although some manufacturing (notably clothing) has moved to even lower-cost locales such as Vietnam, China’s financial sector saw massive foreign investment in 2005. Flagship foreign banks have recently taken tremendous equity stakes in China.

Top 10 sources of FDI

* Source: PRC Ministry of Commerce (MOFCOM)

The top sources of FDI into China in 2006 remained largely unchanged from previous years. Hong Kong continued to lead the list, followed by the British Virgin Islands, Japan, South Korea, and the United States. Taiwan, Singapore, the Cayman Islands, Germany, and Western Samoa rounded out the top 10.

General political atmosphere

The Chinese Communist Party (CCP) has ruled China since 1949, and except for 1989 never faced any serious political competition. The CCP was founded in 1921, and after an initial alliance with the Guomindang (Nationalists) against the Japanese, the CCP defeated the Nationalists and won the Chinese Civil War in 1949. The Nationalists mostly fled to Taiwan, renamed the "Republic of China." The political status of Taiwan has remained an extremely sensitive topic of discussion (preferably, as little discussion as possible) ever since.

Paradoxically to Western observers, the CCP has retained political hegemony even as economic liberalization has accelerated. However, there is significant debate as to what exactly constitutes "private" or "public" in the new age of "red capitalism." The state retains enormous influence over the banking sector, through politicized allocation of loans, many private companies remain hostage to provincial politics.  Provincial governments' control of banks has led to the rise of provincial "fiefdoms" in which significant sectors of private industry are under the de-facto control of local government officials, Chinese citizens are also limited by law to too few investment instruments. In previous years, due to limited options and tax preferences for savings, enormous stockpiles of savings have piled up in Chinese banks, earning negative real interest rates while the savings were loaned out to unprofitable enterprises, especially SOEs, on the basis of political connections.

A recent regulatory change which allowed large chunks of savings to be invested in the stock market has precipitated an enormous boom - or bubble - in the Shanghai and Shenzhen stock markets, as a tidal wave of Chinese savings flooded out of banks and into the stock market, causing equity demand to far outstrip supply. How all these factors play out, and how well China adapts to transparent markets, has been and will continue to play a central role in finance for the next decade, if not for longer.