Foreign direct investment (FDI) in China is forecast to continue on its upward climb from now until 2010, averaging US$85.7 billion and ranking it third in the world, behind the US and the UK respectively, according to World Investment Prospects to 2010: Boom or Backlash, a report released on September 5 by the Economist Intelligence Unit (EIU), the business information arm of The Economist, and the Columbia Program on International Investment (CPII).

According to the report, major investors in China are Hong Kong, the Virgin Islands, South Korea, Japan and the US, which in 2005 accounted for 29.7 percent, 14.9 percent, 10.8 percent, 8.6 percent and 5.1 percent of total FDI respectively. Most of the investments have been in the coastal provinces and second-tier cities.

The report also points out that there are signs of unease within China because some observers are beginning to see "an excessive dependence on FDI" and the negative effects of investment saturation in certain industries.

But Robin Bew, editorial director of the EIU, doesn't agree that FDI inflow into China is excessive. It is still the local businesses that are driving the economy, Bew told Beijing Review, adding that restricting FDI would be a big mistake because FDI drives domestic businesses to constantly improve and be more competitive.

Bew was referring to the Chinese government's conservative attitude toward inward FDI, which is considered by many as a form of control or restriction.

"There may be some restriction (on FDI) in some specific areas, but it will not result in a backlash (of FDI in China)."

According to the report, China is still the preferred investment destination of many international firms. Its commitment to meeting its WTO obligations is a further boost to FDI inflow.

The report reads: "The gradual opening up of sectors such as domestic commerce, financial services, insurance and tourism is underway. Restrictions in terms of the geographical areas in which foreign companies are allowed to set up operations will also be relaxed in 2006-10."

Despite the positive potential of an FDI boom in China, the report also indicates factors that could dampen the situation, including intense price competition, rising raw material prices and corporate tax adjustments for both domestic and foreign firms expected in 2008. Currently, foreign companies operating in China enjoy a preferential tax rate of 15 percent, compared with 33 percent for Chinese firms.

Hence the prediction that most of the FDI will be diverted from China to cheaper locations.

"FDI is not a zero-sum game. For example, we forecast that the gap between FDI inflows to China and ASEAN countries will narrow during the period 2006-10," noted Karl P. Sauvant, executive director of the CPII and one of the editors of the report.

The CPII is a joint undertaking of the Columbia Law School and the Earth Institute at Columbia University, which focuses on the analysis and teaching of the impact of FDI on public policy and international investment law. The EIU is a leading provider of country intelligence. It assesses and forecasts political, economic and business conditions in 195 countries.

(Chen Wen, Beijing Review, reporting from New York, September 7)

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_^[PDF] World Investment Prospects to 2010: Boom or Backlash