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Experts: China to Keep Attracting Direct Foreign Investment - 2004-01-14

Experts participating in a forum on China in Washington Tuesday, are optimistic that the fast-growing Asian economy will continue to attract record amounts of foreign direct investment.

China last year attracted $56 billion of foreign direct investment, more than any other country. Hugh Peyman, an English economist living in Shanghai, believes that trend will continue as China shifts from an emphasis on hard-currency earning exports to satisfying 50 years of pent-up domestic demand for goods.

Mr. Peyman says China is in the midst of unprecedented change, in which the biggest transformation is in the way people think. Communist conformity, he says, has given way to entrepreneurship. He points additionally to the growth of a credit culture, in which consumers no longer have to pay cash for their apartments and for cars and motorcycles.

The biggest changes in the next five years, says Mr. Peyman, will be the development of second tier cities, away from the coast, as a decades-long wave of urbanization accelerates.

"China is projecting that by 2010 there will be another 190 million people living in cities. That's an extra 40 percent. By 2020 it is supposed to be 400 million," he pointed out. "We may dispute some of those figures, but only by three to five years. The fact is that the way problems in the rural areas are being solved is by moving people to urban areas."

David Dollar, a World Bank economist who is taking up residence in Beijing, expects China's stunning growth to continue. But he calls attention to social problems that could deter the flow of foreign investment.

"Looking ahead ten years or so, there's a set of issues around the financial sector that are really quite challenging," he said. "I also mention inequality or what you might think of as social exclusion. And there is a kind of obvious technical answer, which is that China really needs to develop these interior cities that several of us have mentioned."

Mr. Dollar says China has a good investment climate, which is enhanced by rising labor productivity and efficiency. He says those factors are as important in attracting investors as China's low wages, averaging one dollar per hour.

Mr. Peyman is optimistic that China's rigid political system will successfully adapt to demands for more openness and democracy. He says the Chinese public appears willing to tolerate an authoritarian government, because it wishes to avoid a repeat of the social upheaval associated with the cultural revolution of the 1960s.

"And it is really that no return to those days that is giving the government time to push through a lot of very painful [adjustment] measures," he said.

Speakers at the forum sponsored by the Center for Strategic and International Studies say rule of law in China has been strengthened by the country's accession to membership in the World Trade Organization.