China

The white peril

Mar 30th 2006 | BEIJING
From The Economist print edition

China is starting to worry about the size and impact of the foreign investment it has so assiduously courted

The debate over foreigners intensified last year, with some papers publishing blunt criticisms of the sale of stakes in Chinese state-owned banks to foreign banks. The deals, critics said, were priced too low, given the huge amount previously invested by the state in recapitalising them because of bad debts. They also worried that the 25% share allowed to be held by foreign companies in each bank would bring the country's vital financial levers perilously close to foreign control.

Some grumbling is hardly surprising in one of the developing world's most open economies. But is it likely to make much difference to further reforms or the opening of the economy to foreign investment? There have been mixed signals. In response to public criticism of asset stripping during management buy-outs of state-owned enterprises, the government last April introduced new restrictions (though not an outright ban) on such sales.

Also, in recent months Chinese leaders have been emphasising the need for “independent innovation” in technology, implying less reliance on foreign know-how. A possible side-effect of this was a ministerial statement this month that China will rely on its own technology in the construction of high-speed rail links between Beijing and Shanghai and between Shanghai and Hangzhou. German, Japanese and French firms have been lobbying for years for involvement in these projects.

But the leadership was also at pains during the recent parliamentary meeting to stress that economic reforms remained on track. “Retreat offers no way out,” said the prime minister. Officials continue to show eagerness to court foreign investment, an engine of economic growth especially in big cities, where stability is vital to the party's grip on power.

Chinese enterprises have long complained bitterly about tax privileges enjoyed by foreign investors, who have to pay income tax at only 15% compared with a 33% rate for domestic firms. But the legislature continues to dither over the drafting of a law that would unify these rates. It worries that setting them at a level close to the foreign tax rate might considerably reduce revenues, but that doing so much above 15% might scare away foreign investment. One theory is that a unified rate of around 25% will be set this year, with the increases for foreign companies to be phased in over five years.

Just as critics of economic policy are having a greater say, supporters are no less vocal. A book published last month, “Great Breakthrough”, argues vigorously in favour of greater private-sector involvement in industries hitherto the preserve of the state, such as telecommunications and energy. Private entrepreneurs, it says, have become increasingly concerned by the anti-reform sentiment aired in the past year. Huangfu Ping, a pseudonymous commentator whose articles in 1992 helped launch a wave of market-oriented reforms, returned to the fray in January with an article in a leading business magazine attacking what he called “a new wave of thought” opposing economic reform.

Among the country's top leaders it is likely that the same logic will prevail as did in the early 1990s when reformists in the party faced a far more serious challenge. At that time the late Deng Xiaoping won the debate by arguing that the party's survival depended on economic growth. This, he reasoned, could only be delivered by opening China wider to foreign investment and breaking the state's grip on the economy. The current leadership has been talking about steering the country away from a blind pursuit of growth and paying more attention to the concerns of the marginalised. But it shows no desire to abandon Deng's formula for success.