As the effect of the global financial crisis starts to spread, investment activities worldwide have gone sluggish, even in China the country that has been the largest recipient of foreign direct investment among emerging countries for 17 years in a row.
The country is going to have over US$90 billion of FDI in 2008, Chen Deming, the commerce minister, said in the national commerce work meeting in Beijing in December 2008.
That is still higher than the US$74.8 billion capital inflow to the country in 2007. But the monthly capital inflow has started to drop, indicating a trend of slowdown investment activity. It declined by 36.52 percent year-on-year in November to US$5.3 billion, according to the Ministry of Commerce.
The decline in investment is mainly caused by two factors. Tight global credit has slowed down investment activity worldwide. And the once-guaranteed appreciation of the yuan has also stopped since the second half of this year, removing one of the key motivations to tap into the Chinese market. Many experts estimate that the decline will continue in 2009.
Thanks to the active investments in the first half of 2008, some cities in China are still doing reasonably well in general. But as the outlook gets grimmer, they have to think of more methods to retain existing investors and to attract newcomers.
Among them is Shanghai, the city that was innovative in appealing to investors even before the crisis. Shanghai is expected to attract US$10 billion of FDI in 2008, up by 20 percent year-on-year.
The foreign lure is related to Shanghai's special policies in attracting and retaining foreign investors. As the different regions in China have competed for foreign investment in the recent years, Shanghai has positioned itself as China's multinational business headquarters and its policies include some financial incentives to encourage foreign companies to set up regional headquarters even if the companies are short of capital.
For instance, the Huangpu district of Shanghai offers enterprises registered in the district or with plans to set up its headquarters in the area a subsidy for housing decoration.
If a company rents an office building with an area of over 1,000 square meters for over three years, it can get a subsidy ranging from 500,000 to 1 million yuan. The subsidy rate can be even higher if the area is more than 5,000 square meters.
The local government also gives training subsidies to enterprises that set up their headquarters. It offers to cover 30 percent of a company's training fee for three years running if the headquarters are in Shanghai. According to a local government official, many foreign companies are in a slump, but enterprises have to pay more for training if they want to keep the employees and the training subsidies have been very attractive to companies with plans to invest in China.
Shanghai started to shift its policy on foreign investment several years ago for two reasons.
