The SARS epidemic has temporarily affected China’s economic activities, as well as the rapid growth of foreign direct investment in the country. However, just as the catastrophic flooding that hit China in 1998, the sudden disaster of SARS will have only a short-term effect on the country and cannot change the long-term trend of investment from overseas.

The following 10 major new trends are expected to emerge in China’s foreign capital utilization:

-Foreign direct investment in China will maintain steady growth in the coming decade. China enjoys tremendous potential for economic development. The fundamental improvement in market order and investment environment after China’s WTO accession and the long-term competitive advantage of low-coast labor constitute favorable conditions for the steady growth of foreign investment in China. Meanwhile, China also faces many uncertain and unfavorable factors brought about by the fluctuating global economic situation and fiercer competition with other countries in foreign capital attraction. Nevertheless, overseas investment in China will continue to grow, but the momentum of rapid development as seen in the early 1990s is unlikely to reappear. The growth rate is expected to maintain a level between 5-10 percent.

-The growth of overseas investment in the service sector will exceed that in industrial sectors. To honor its commitment to WTO accession, China will open its service and trade sectors wider to the outside world. Hence, investment from overseas service business is expected to increase rapidly. As the restrictions on market access to service industries, chiefly banking, insurance, telecommunication service, commerce and transportation, have been lifted, foreign investment in these sectors will grow faster than in industrial sectors. According to preliminary estimates, overseas service businesses’ investment in China will increase by 10-15 percent annually in the coming decade, and the proportion of newly added overseas investment in the tertiary industry will account for 40 percent of the total foreign investment in China.

-Labor-intensive industries will continue to be the main destination of overseas investment, and investment from high-tech industries will grow rapidly. Following the reform of the system that restricts the access of foreign investment, changes will take place in the destination of overseas investment. Typical labor-intensive industries, such as clothing furniture, stationery, sports goods, leather, fur and other manufactures, will continue to be the projected destinations of overseas investment. Electronics, telecommunication equipment, meters, instruments and electromechanical industries are likely to remain as the main attractions of overseas investment, owing to their high profits and low tax rates.

Thanks to China’s policy of encouraging investment in new and high-tech industries, investment from transnational companies based in developed countries has increased continuously in recent years. While investment in individual projects has gone up, that in high-tech industries and in the establishment of regional headquarters and R&D centers of transnational companies has increased in large amounts. This has helped upgrade the technology and industrial structure of foreign-funded enterprises.

-Transnational merging may become a new form of investment. The Chinese Government is stepping up study and exploration of decrees and policies on transnational merging. In November 2002, the former State Economic and Trade Commission and the Ministry of Finance promulgated provisional regulations for attracting overseas investors to participate in the asset reorganization and merging of state-owned enterprises. This has provided transnational companies with a basis of legality and policy for investment in China through merging, particularly the merging with state-owned enterprises. With the completion of relevant laws, regulations and policies, various forms of transnational merging, such as stake acquisition, purchase and equity exchange, will become one of the main forms and channels for transnational companies’ investment in China.

-The ratio of enterprises exclusively funded by transnational companies will increase significantly. To avoid interest clashes with Chinese partners and given the fact that China has lifted restrictions on the sale of products of exclusively foreign-funded enterprises in the domestic market, more transnational companies are likely to make their way into China through exclusive investment. A considerable number of existing joint and cooperative ventures will be turned into exclusively foreign-funded enterprises through equity purchase.

-Foreign-funded enterprises geared to China’s market will grow in large numbers. Following the freeform of the system that restricts the scale of foreign-funded enterprises’ products in China and the continuous expansion of the Chinese market, foreign-funded enterprises will readjust their marketing strategies to accommodate fluctuations in international and Chinese domestic markets and their profit expectations. A dominant number of foreign-funded enterprises will gear themselves to the Chinese market, which will benefit China’s densely populated areas, including large cities in central and west China.

-Foreign-funded enterprises will gradually replace traditional processing trade as their main form of business with multiple forms of trade. Owing to high tariffs, limited domestic coordination capacity and low cost processing in bonded zones, most foreign-funded enterprises exported their products through processing trade. On average, processing trade accounted for 70-80 percent of enterprises’ foreign trade, and the proportion of capital-intensive enterprises was even higher. In the future, with changes in foreign-funded enterprises’ targeted market, the improvement in domestic coordination capacity and the progress in the reform of foreign trade and foreign exchange management systems, the proportion of exports based on domestic purchase may rise, and multiple forms of trade will gradually take shape.

-Existing foreign-funded enterprises will enhance their functions as main operators and further increase their level of internationalization. Since its WTO accession, China has undergone major reforms of its trade, investment and foreign exchange management systems. The country will fulfill its long-term goal of opening the domestic capital market in stages. Policies in line with international practices that facilitate the independent operation of enterprises will gradually be formed. This will help foreign-funded enterprises to grow into entities with comprehensive functions of modern enterprises. Through their internationalized performance and capital operation, these enterprises may turn into China’s main overseas investors.

-Gigantic foreign-funded enterprise group will proliferate. Since the 1990s, the number of large projects funded by foreign direct investment has increased continuously. They involve huge amounts of capital and represent a high technological level. Many large transnational companies have announced or begun on plans for investing plentifully in China. In the future, with the gradual implementation of these investment plans, the number of large foreign-funded enterprises will increase considerably. In addition, with the restrictions on foreign-funded holding companies lifted, many transnational companies will reorganize their businesses in China. This will give rise to a large number of gigantic enterprises groups managed and controlled by their China-based regional headquarters.