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Changes in China's Foreign Investment Policy

Changes in China's Foreign Investment Policy

CHUNG Sang-Eun

July 24, 2006

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China has attracted a huge amount of foreign investment since its reform drive and market opening. It is the world's third largest foreign investment destination after the United States and Britain.

China's rapidly growing economy has absorbed a staggering amount of investment as its government provides preferential treatment to foreign-invested businesses so as to make up for weakness in infrastructure. It has opened up its economy, set up special economic zones, reduced tax, and promoted export, all for the sake of drawing more foreign investment.

China's foreign investment policies have recently changed, however. With the rise in its savings and current account surpluses, China's need for providing preferential treatment to foreign-invested business has declined. Not only that but an increasing number of Chinese people have begun viewing the preferential treatment for foreign-invested businesses as a form of reverse discrimination against local investors and companies.

Against this background, focus of China's foreign investment policy has shifted from volume expansion to quality investment and efficiency. In its 11th five-year (2006-2010) development plan, passed by the National People's Congress in March 2006, the Chinese government stipulates that it promotes efficiency over quantity. According to this policy guidance, the government has cut preferential treatment for foreign businesses and strengthened supervision over them. Foreign businesses operating in China need to keep abreast with the policy changes.

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