Foreign Investment in China Is Slowing Down

China, where foreign businessmen increasingly complain about high costs, bureaucratic tangles and tighter currency controls, is experiencing its first major slowdown in overseas investment in seven years.

The Ministry of Foreign Economic Relations and Trade recently announced that the value of foreign investment contracts in the first half of this year slumped 20% to $1.24 billion. The $5.85 billion for all of 1985 was a record.

“Last year, direct foreign investment in China increased very fast,” the ministry’s deputy director, Liu Xiangdong, explained. “It’s obvious that to maintain an increasing speed is impossible for every year, and also is not necessary.”

But foreign businessmen and Western diplomats say the first slowdown since China’s modern “open door” policy began in 1979 reflects a growing awareness that tapping the vast Chinese market and repatriating the profits is often more trouble than it is worth.

One of the main factors has been a tightening of China’s foreign exchange purse strings following runaway spending by provincial and local authorities in late 1984 and early 1985. Reserves fell by almost $4 billion last year to $10.85 billion. Local enterprises are now required to submit contracts to the central government for approval to ensure that they do not violate currency regulations. Some joint ventures have reportedly been stalled because the Chinese partner cannot obtain foreign exchange.

In a well-publicized case this year, Peking Jeep Corp., a joint venture set up by American Motors to produce four-wheel-drive Jeeps, had to halt production because of a shortage of hard currency to buy spare parts.

Foreign Exchange Problems

Although Chinese commerce officials point out that 90% of the country’s 2,645 equity joint ventures are profitable, Western diplomats say that few of them, apart from hotels, are balancing their foreign exchange accounts.

Liu’s remarks gave no indication that China was about to relax currency controls. One Western commercial attache said the restrictions are likely to continue “for at least two years.”

The currency problem is only one in a litany of complaints by foreign businessmen.

Chief among investors’ headaches are the problems of dealing with China’s byzantine bureaucracy: identifying the best department to deal with, arranging meetings and even paying bribes to corrupt and underpaid officials.

One commercial attache advised businessmen to request appointments one or two months in advance during the busy spring and fall seasons.

“The friendly (Chinese) negotiator of 10 years ago, respected and liked and talked about in positive terms to other foreigners, features less and less” in conversations among businessmen, said Stephen FitzGerald, former Australian ambassador to China.

Despite China’s recent efforts to publish commercial laws, businessmen still complain that Chinese partners cite binding “internal” restrictions without disclosing the specific rules in question.

“There is a sense . . . that one never really knows where one stands, that rulings and approvals are simply an expedient to persuade the foreigner to accept a certain view or sign an agreement,” FitzGerald told foreign businessmen in Peking recently.

Cost of Maintaining Staff

Then there is the soaring cost of maintaining expatriate staff in China. Monthly office rent in one of Peking’s four major Western-style hotels--where most companies operate--is $11.80 per square foot, more than five times the rate in Paris.

Chinese workers must be hired from the government’s labor bureau and paid higher salaries than in most other Asian countries. And foreigners have recently been told to increase local staffers’ pay by up to 100%.

Western diplomats said China’s investment climate is still favorable for projects in “priority” areas such as energy, transport, communications and raw materials production, but they predict a continuing slowdown in investment for the next two years.