Frustrated Investors in PRC II: Japan's Complaints

♠ Posted by Emmanuel in , at 9/10/2010 12:47:00 AM
This post continues on a number of themes we've carried in the past here at the IPE Zone. First is the obvious one of foreign firms believing that their economic freedoms are being limited in the PRC. Previously, they were pressuring the PRC to not implement "buy China" provisions when it comes to government procurement of high-technology goods. So China made concessions on that end, but apparently the Europeans and Japanese remain unhappy about evolving business conditions. Second is another trade-related complaint that China was limiting the export of rare earth metals crucial for the production of certain high-technology products. I opined that China should treat this matter strategically: given its historical grievances over Western countries not being willing to export advanced products to China over their dual use (civilian or military) nature, a deal remains in the offing wherein China would allow export of rare earth metals provided the West reciprocated by removing dual use as grounds for limiting exports to the PRC.

Anyway, on to excerpts from the article from the WSJ:
Japanese Foreign Minister Katsuya Okada warned Thursday China risks losing foreign investments unless it introduces more transparency and consistency into its business rules, including its legal framework to deal with labor issues.

Swinging back at Beijing in an emerging dispute over the treatment of Japanese companies operating in China, Mr. Okada said a lack of comprehensive rules makes it difficult for foreign investors to solve labor disputes and other problems they face with increasing frequency in the nation. "Foreign companies have faced problems in China that are unthinkable in a normal business environment," Mr. Okada said in an interview with The Wall Street Journal. "We will keep bringing up these issues and we hope China will take notice and make corrections."

China repeatedly has defended its policies toward foreign companies, pointing to continued growth in foreign investment as evidence that it doesn't discriminate...Earlier this year, a wave of strikes disrupted local production at Japanese manufacturers, including Honda Motor Co. and Toyota Motor Corp. During his visit to Beijing on Sunday, Chinese Premier Wen Jiabao suggested to Mr. Okada labor disputes were caused by relatively low pay for workers at these factories and requested companies address the situation.

Among other examples of problems Japanese companies have had to deal with, the foreign minister also pointed to abrupt cuts in exports of rare earth metals used in manufacturing hybrid cars, and unfavorable local court rulings and weak implementation of favorable rulings for companies facing intellectual-property disputes.

Mr. Okada said that because China is such an attractive market, recent problems aren't enough to discourage companies from reducing investments or withdrawing from the nation. "But if these problems continue to occur, there will be negative effects on future investments," he warned...

The foreign minister's complaints about the business environment echo those of executives and officials from the U.S. and Europe. Separately on Thursday, the European Union Chamber of Commerce in China urged the Chinese government to allow foreign businesses better access to its vast domestic market, and said regulatory barriers could threaten investment despite the economy's rapid growth.

"China is still one of the most heavily controlled economies in the world," Jacques de Boisseson, the chamber's president, said at a news conference in Beijing to mark the release of its annual position paper on business conditions in China, which pointed to several examples of stringent licensing requirements and arbitrarily enforced legislation that create headaches for foreign businesses.

While the regulatory problems haven't led European companies to shift investment out of China, Mr. de Boisseson said, that could change if the environment doesn't improve. He said he expected the government to take steps, noting that the Chinese premier and other officials have repeatedly welcomed foreign investment in China.
So there's a lot of bellyaching from Europeans and Japanese; that much is clear. However, what does the record for foreign investment inflows to the PRC indicate? It seems FDI in China is, in reality, steadily increasing:
China drew 29 percent more foreign direct investment (FDI) in July than a year earlier, with global firms still flocking to the country to build factories and set up research centers despite a bout of labor unrest. FDI inflows, which surged after the country joined the World Trade Organization in 2001, have recovered steadily this year after being hit hard by the global economic slowdown.

Although China has recently been hit by a series of high-profile labor disputes -- notably, at suppliers to Japanese automaker Honda Motor Co -- it continues to exercise a magnetic pull on foreign businesses setting up production facilities. In July alone, China attracted $6.9 billion in FDI, up 29.2 percent from July 2009, the commerce ministry said. It drew $58.35 billion in foreign direct investment (FDI) in the first seven months of the year, up 20.7 percent from the same period in 2009.

In the latest example of large-scale investment, German chemicals firm BASF said on Tuesday that it would build a new dispersions plant in the southern province of Guangdong. Chinese wages have been rising, but productivity has been rising even faster in most industries and labor costs remain far lower than in developed economies. Investors are also attracted by the country's modern infrastructure and the prospect of tapping its fast-growing domestic demand.

Much of the investment in the past has been concentrated in China's export heartland along the coast, but Yao Jian, a commerce ministry spokesman, said that money was starting to flow to the interior where costs are lower. "The western regions are showing greater potential for attracting foreign direct investment," he told a regular news briefing. Western China attracted $3.89 billion of FDI in the first seven months, up 19.2 percent from a year earlier, according to the ministry.
So, there are two things to keep in mind: First, increases in PRC productivity may be outpacing wage increases, leaving the PRC as an attractive FDI destination. Second, no one seems to be pulling out of China in a big way. I guess the rest of the countries in the region will have to work hard at keeping up with the Jis.