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To: TobagoJack who wrote (541)	12/13/2002 11:13:55 PM
From: TobagoJack	Respond to of 867

China: Investment Drop Fuels Debate Over Economic Policy Dec 13, 2002 stratfor.biz Summary The massive boom in foreign direct investment that followed China's entry into the World Trade Organization last year slowed in November, and the Asian Development Bank is forecasting a slight decline in China's GDP growth rate for 2003. FDI has been a key part of China's overall GDP growth, and a reduction in investments -- coupled with the ongoing rise in unemployment -- could be troubling for China's new leadership. Analysis Foreign direct investment (FDI) into China fell 18 percent year-on-year in November to $3.4 billion, the Ministry of Foreign Trade and Economic Cooperation reported. Although China's year-to-date overall investment inflows are still up 14.6 percent, the slight dip may be an early indicator that the rush of investments following China's entry into the World Trade Organization a year ago is beginning to subside. Beijing has relied heavily on FDI to bring money, infrastructure and technology to China, and Chinese statistics suggest FDI comprises more than one-third of the nation's total GDP. For Beijing, FDI has become an invaluable tool in maintaining growth rates that allow China to keep pace with, or at least not be too overwhelmed by, rising unemployment levels. But a slowdown in FDI may throw Beijing's economic plans into turmoil and leave the government facing a disrupted and disgruntled society. Beijing faces a serious challenge in keeping FDI rates rising at the same pace or faster than before. The U.S. Embassy in Beijing already is warning U.S. companies to be more careful about entering into deals in China. Thomas Lee Boam, minister-counselor for commercial affairs, said during an interview at a recent American Chamber of Commerce event that 75 percent of the complaints his office receives from U.S. companies accusing China of breaking WTO regulations are actually just bad business deals. The rush to enter China soon will thin out, and only those companies knowledgeable about Chinese law and business and willing to make a long-term strategic investment will remain. Another potential drag on investment rates is the rising cost of labor in China. In some eastern cities, labor and living costs match those in Malaysia and Thailand, according to a recent study by Citigroup. While plenty of Chinese cities remain cheap and largely untouched by foreign investors, investing there requires additional preparation and may entail extra transportation and infrastructure costs -- not to mention the inequality with developed eastern cities when it comes to human networks. The Asian Development Bank (ADB) reported Dec. 12 that China's GDP growth rate is expected to slow to 7.2 percent in 2003, from the current rate of 8 percent. Though this is still within the range Beijing claims is necessary to keep pace with unemployment, the ADB numbers are themselves subject to the vagaries of China's own statistical system -- something Beijing is trying to improve not only to polish its image abroad but also to finally give the government a clear read of the economic and social situation inside the country. A shift in government leadership is currently under way, and the top economic team will be reshuffled during the March 2003 National People's Congress session. One issue that will be high on the agenda will be how to maintain China's growth rates without destabilizing the country. Debate already is raging in Beijing as to how best to strengthen the nation. On one side are those who argue that China can be strong only if it continues to harness the strength of the masses -- the lower-class rural and urban workers who make up the bulk of the population. On the other side of the aisle are those arguing that the world is not what it was in the 1940s, and that China must look instead to technology and private entrepreneurs to build a strong society. It is this second group that now appears to be winning. While this may seem a typical battle between "conservatives" and "liberals" in the government, it goes much deeper than ideology. The "conservatives," who often are criticized in the West for their hard-line and outdated views, look at the growing economic disparity in China and see the stage being set for another class struggle. Yet despite their Communist backgrounds, they are not looking to foment the struggle, but rather to maintain stability and the status quo. For their part, the "liberals" look at the technological advantages of the United States and see China quickly losing any war with the United States if it cannot accelerate its own technological development. From their point of view, the human wave tactics that repelled the U.S. military in the Korean War cannot work -- and neither can relying on inefficient mass labor to build a strong and prosperous China. With the liberals having the upper hand, Chinese economic policy will continue to focus on efficiency, technology and harnessing big business to the government's plans. The liberals, too, recognize the dangers of allowing the lower classes to slip further down the economic ladder, but they are willing to gamble that China's overall economic growth eventually will lift all boats. There is a risk, however, that social stability will break down before the efforts to develop a small but prosperous and efficient social sector pays off across the nation.