Suzhou is known to be a model city for China's introduction of foreign capital manufacturing. Historically, this city is well-loved for its poets and artists, and its beautiful sceneries. It is also a unique window that reflects China's reform, opening up, and rapid economic development. Suzhou is also the place with the most Taiwanese companies, and as another Chinese manufacturing capital comparable to Shenzhen, Suzhou was once a gathering place for the world's top 500 companies.
Gary Ting, managing partner of Shanghai Kymco Capital, who had years of experience in China, shared his views on Suzhou. He has visited many companies in Suzhou and the city itself for the past years and he discovered during his recent visit that Suzhou has changed a lot. After asking a partner about this, he learned that in the past few years, there have been a number of foreign companies with hundreds of thousands of employees like Nike, Adidas, Philips, Nokia, and Seagate pulling out from Suzhou to Southeast Asia. The withdrawal of foreign capital does not only happen in Suzhou. In April this year, South Korea's Samsung closed down Shenzhen Samsung Electronics Telecommunication, its only network equipment manufacturer in mainland China; on May 7, Olympus also announced the closure of its camera manufacturing factory in Shenzhen.
Some believe that the withdrawal of foreign capital from China will not bring much consequence; after all China is not short of funds. However, Anbound research team points out that this view is far from being true. China not only needs foreign capital during its early stage of reform and opening up, it also needs a large amount of foreign capital now and in the future. A strong, open and prosperous market will always require the participation of international capital and enterprises. This is true of all the developed market economy countries in the world. Anbound believes that in the current stage of China's economic and industrial development, if there is a lack of foreign participation, the following aspects of China will be affected:
(1) China's industrial innovation capacity, key technologies, and service industry standards may experience a sharp drop immediately because many of Chinese industrial standards and industrial models rely on the introduction of foreign capital. (2) A large number of foreign capital withdrawals will impact the industrial chain of China's manufacturing and service industries. (3) Prosperity in some urban areas with higher foreign capital concentration will be affected with the withdrawal of foreign capital. The change of Suzhou as experienced by Gary Ting is a typical example. (4) The reduction of foreign investment will directly affect the Chinese economy. In 2017, a total of 35,652 foreign-invested companies were newly established in the country. The actual use of foreign investment was RMB 877.56 billion, a year-on-year increase of 7.9%, which is an indispensable part of the Chinese economy. (5) The input of foreign capital to the Chinese market will be weakened. (6) The confidence of the international market in the Chinese market will be eroded, which will in turn reduce the degree of China's participation in globalization. From January to April of 2018, China actually utilized RMB 286.78 billion of foreign capital, an increase of only 0.1% year-on-year (nearly zero growth), and one should pay attention on the trend of the significant slowdown in China's foreign investment.
Since foreign capital is very important to China, why is foreign capital now withdrawing from China? There are many reasons for this; the most direct reason is the change in cost factors. With the process of urbanization, land prices and labor costs in China have significantly increased. If low-end manufacturing or foundry businesses that continue to do simple processing cannot survive, such foreign capital can only be transferred to Southeast Asia where labor costs are lower. As a matter of fact, this trend has already begun to appear in the past few years. It is not just that foreign companies cannot afford the cost hike, some large Chinese local companies are also unable to bear it. For example, Huawei has moved many production departments from Shenzhen to Dongguan.
The second reason is the changes in China's policy environment. Some foreign investors believe that China's policies are less "friendly" to foreign investment. To these foreign investors, China is not lacking of capital now. China's taxation, land, environmental protection, and social security policies are all in the midst of systemic adjustments, and generally speaking China is becoming stricter towards foreign capital. At the same time, in terms of market access, intellectual property protection, fair competition, industrial policies, legal environment, and national treatment, China has not shown any improvement in synchronization with the aforementioned policy tightening. As a result of these changes, a considerable number of foreign investors feel that it is getting harder and harder to do business in China. Therefore, when the globalization situation changes (such as the anti-globalization wave), and other countries start giving better policy conditions (such as the United States' tax cuts, Southeast Asian countries' preferential policies), foreign capital will choose to withdraw from China.
The third reason is the special requirements of China in certain fields. This is mainly reflected in: (1) China's relatively strong technology transfer requirements for foreign investment are raised in order to increase the localization rate and to acquire advanced technologies; (2) China adopts some strategic considerations (such as "Made in China 2025") and uses finance funds or government resources support state-owned enterprises or private enterprises to form unequal competition with foreign capital; (3) Due to the consideration of national security (key industrial security, financial security and others), China implements "de- foreign capital" in some areas (such as "de-IOE"), which forms a certain degree of exclusion and pressure on foreign investment.
Final Analysis Conclusion:
Judging from different historical stages of development, the problems encountered by foreign capital in China are no longer the "primary" issues such as tax incentives and land concessions, but are related to more "advanced" ones such as competitive and policy environments, intellectual property protection and fair competition issues. This in turn puts forward higher requirements for the Chinese government's decision-making research, policy adjustment, and the concept of reform and opening up in the new period. This also means that China's development and its strength are inseparable from foreign investment; this is equally true in the past, present and future.
