In June, Ernst & Young revealed that China is now the world’s most attractive destination for foreign direct investment (FDI), securing 47% of votes in the survey. China’s economy is now set to welcome foreign resources – especially from the west where investors and business owners are looking for a place to harbour their capital from the current financial storm.
But something doesn’t add up. Despite the region’s economic stability and willingness to open its economy to the global marketplace, China still only attracts 8% of global FDI (compared to 37% in western Europe).
Put simply, China is undergoing an image problem: after all, less than 40 years ago, China was a closed, totalitarian state behind the sinister Bamboo Curtain. However, since the introduction of economic reforms in 1978, China has industrialized rapidly and embraced the capital markets, growing by an annual average of 10%. Although modern-day China has moved on, it is still haunted by the shadows of its history.
Ironically, 2008 was to be the year that China would finally confirm its development to the world. The Beijing Olympics was the perfect opportunity for China to demonstrate its economic and political supremacy to an international audience. Rather, high-profile media coverage of the numerous protests against the Chinese government presented a very different picture. The world has seen the dragon of old – Chinese military sweeping aside demonstrators in an attempt to silence opponents.
Allaying Doubts
Some foreign investors do not feel that their capital would be safe if invested in China’s economy. Is this fear justified? The Chinese authorities are attempting to facilitate FDI by implementing policies aimed at strengthening and diversifying their economy. In January, the China Securities Regulatory Commission (CSRC) set out to develop the bond market and improve the quality of listed companies in order to make them more appealing to FDI.
“With sophisticated legal and regulatory systems, bigger and more efficient markets and improved international competitiveness, China’s capital markets can play an important role in building a harmonious society,” sates the CSRC. “Then China will become a significant and influential member of the world financial system.”
And so, a process is underway: China’s insatiable appetite for resources and finance has forced it to look beyond its borders, thus fostering an international business environment. The back-room secrecy that once dominated Chinese business practice is slowly being replaced with disclosure and transparency procedures, corporate governance, auditing and the declaration of quarterly results.
Old Habits
However, establishing international confidence and credibility has been difficult for China. For all the government’s “forward thinking” policies, the future success of FDI in the region rests upon the government and business community’s willingness to change.
It is ironic that the companies least willing to adapt and meet the government’s international vision are China’s State Owned Enterprises. Also, despite the rhetoric, the Chinese government remains unafraid to make heavy-handed interventions into the equity markets, evidenced recently when they reportedly capped the bid of two state-owned banks for Wing Lung Bank.
Is China really ready to let outsiders in and fully integrate FDI into its economy? For the moment, China is wrestling with this question – and perhaps the Chinese business community has not fully escaped from the shadow of its closed, totalitarian history.
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