When China’s national legislature, the National People’s Congress, convenes in March, its new leaders will face many challenges, but enticing foreign investors will not be one of them.
Instead, incoming President Xi Jinping and future Prime Minister Li Keqiang will be looking outward to secure China’s rise as a global power and looking in to devise a more sustainable growth model.
To appreciate why foreign investors will be sidelined, one must understand how China got to where it is today. First, Deng Xiaoping’s 1978 policies gave birth to special economic zones and other policy tools that offered incentives to foreign investors and opened China to foreign trade and investment.
Second, for more than three decades, foreign investors financed a multitude of special zones, powering China’s economic development. The initial vision was China as the factory of the world, supplying foreign investors with cheap labour to make products designed only for export. However, in recent years, as the Chinese demographics changed, wages have risen and the supply of cheap labour has become a wish. Many foreign investors have relocated to other Asian countries, while others have repatriated their production. The 3.5 per cent decline in foreign direct investment during the first 10 months of 2012 indicates a trend that is set to accelerate.
China’s fourth generation of leaders tried to adjust to reality by moving up the value chain. They have even parcelled out some of their own low-tech production to Chinese-led special economic zones in African and other Asian countries. They have encouraged investment in research and development, clean technology and environmentally friendly production.
But that is not nearly enough. The growth-at-all-costs mentality in the world’s factory remains largely unbridled and has caused severe damage to the environment. The result is so much chronic pollution of the air, land and water that it now threatens human health and social stability.
Investment in the physical infrastructure has been huge and relatively successful, but the human infrastructure, populated mainly by party members, is failing. The issue is whether Xi has the stomach for reforming the opaque authoritarian political system that is riddled with corruption.
The economic slowdown in the West has shrunk the world’s appetite for China’s manufacturing, so the new leaders can no longer rely on the export-driven model. They need to shift toward reliance on Chinese consumers who Xi believes want better education, health care and a clean environment. To give the people what they want, he must fashion a new growth model.
And that model is unlikely to rely on inward foreign direct investment. Despite its obligations under the World Trade Organization, China has been slow to open its market to imports or the China-made goods of foreign investors. There are no signs that Xi will change that soon.
Instead, Xi will support China’s “going-out” policy, which forces Chinese companies to invest abroad. From an annual average of less than $3 billion before 2005, when the going-out policy was introduced, China’s outward forward direct investment grew to more than $60 billion in 2010. During the first eight months of 2012, it rose almost 26 per cent to $58.2 billion — not including the $15-billion acquisition of Canada’s Nexen announced in December. Pundits forecast that China will invest $1 trillion to $2 trillion globally during Xi’s tenure. This resonates with China’s agenda to internationalize its renminbi as a rival currency to the U.S. dollar, but it will also dwarf China’s foreign direct investment inflows and put the interests of foreign investors on the back burner.
Meanwhile, the rest of Asia — and the world — will struggle to find a way to pacify China’s territorial claims while accepting its investments. And Xi will struggle to build credible roles for China as a responsible global power.
Connie Carter is a professor of law and international business at Royal Roads University.
