International ties

West should embrace competition

By Li Ruogu (
Updated: 2011-01-11 16:45
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Among the respondents "Adjusting Business Schemes in China," over 80% planned to expand investment, R&D, production and procurement in China. The survey concluded that China’s investment climate showed no signs of deterioration.

Japanese companies and media didn't join the chorus of complaints about China's investment climate, for the simple reason that the recovery of the Japanese economy to a large extent relies on the Chinese market.

Survey on International Operations of Japanese Firms(FY2009) published by the Japan External Trade Organization (JETRO) in March clearly indicated that a majority of Japanese companies (66%) planned to expand investment and explore new business opportunities in China in the coming three years. This percentage was higher than the 50% shown in the 2008 survey and much higher than the percentage of American companies responding to similar questions.

Japanese companies with plans to downsize or withdraw from the Chinese market accounted for only 0.5% of the surveyed, the lowest since 2004. Therefore, Japanese companies are more optimistic about China's investment and business climate than their American and European counterparts.

The annual Doing Business by IFC did lower China's world rank from 86th in 2009 to 89th in 2010. This can be mainly attributed to the adoption of a different calculation method, which did not reflect the real picture of the investment climate in China.

First of all, the IFC annual report was not based on business surveys. Instead, some quantitative indicators related to starting and closing a business, getting credit, registering property, paying taxes, trading across borders, enforcing contracts, dealing with construction permits (for example, procedures, time and cost to obtain construction permits), and employing workers were used as the criteria to judge whether existing laws and regulations, as well as systems, were in favor of investment. Yet quite a number of such indicators were not comparable among countries with different legal and social systems.

In addition, the IFC ranking system largely relied on legal provisions and ignored their real cost and effect after application. For instance, as for enforcing contract, an essential indicator in a market economy, China was ranked 18th in both 2008 and 2009. Both the period and the cost of contract enforcement in China were much lower than the average of the Organization for Economic Cooperation and Development (OECD) or developed countries. However, China was ranked at the bottom (108th) in terms of time to obtain construction permits. Although its speed and scale of construction were among the highest in the world, the relatively strict procedures have pushed China down to the lower end of the list.

The IFC rating system was far from scientific and objective, and the important indicators of enforcing contract and trading across borders were not given a fair weight, and thus affected China's ranking in terms of business climate. In 2010, China's ranking lagged far behind developed countries, and even lower than Belarus (58th) and Mongolia (60th). This was clearly not the true picture.

Second, the change in the annual Doing Business ranking merely reflected the revision of certain laws and regulations. In the 2010 report, China's ranking in many aspects remained stable and even improved. Albania moved up from 89th in 2009 to 82nd in 2010 because of its regulatory reforms in starting and closing a business and trading cross borders. China was ranked lower because only its considerable improvements in cross-border trade were acknowledged. (IFC, 2010).

These analyses showed that China's investment climate had become more attractive rather than deteriorated after the financial crisis. Most American, European and Japanese companies are optimistic and planning to increase investment mainly because of China's huge market potentials and higher returns on investment. Examining the surveys made by various foreign chambers of commerce in China, the problems related to law enforcement, management talents and intellectual property rights (IPR) protection are all old stories rather than major evidence of the so-called deterioration of investment climate.