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The author Cui Ying is an economist with Analysis Points Associated Consultants, a private think-tank based in Beijing.
China should gradually reduce its dependence on foreign funds and trade when stimulating its economy.
The US House of Representatives passed the Homeland Investment Act (HIA)/Invest in the USA Act this year, allowing US companies to repatriate offshore cash balances at a reduced tax rate.
The proposal would temporarily reduce the current 35 percent tax rate and replace it with a 2.5 percent tax rate, if those companies bring their foreign subsidiaries' earnings back to the United States as investment.
According to JP Morgan, such a move will bring offshore profits of US$400 billion back to their homeland, boosting investment in the United States. However, it might mean tough times for China.
Before the Act was passed, many US companies preferred to accumulate cash balances in their foreign subsidiaries, rather than returning them to the United States as a dividend, which to be taxed up to a high 35 percent rate.
Statistics show that profits of Intel and Coca-Cola left outside the United States reach US$6 billion, while for GE, the figure could climb to US$15 billion.
When the HIA came into effect, many enterprises, such as Intel, 3M and Heinz, displayed their willingness to take advantage of the HIA and increase their investments in the United States.
A report from Business Weekly says that in 2005, the HIA can bring profits of US$350 billion back to the United States. And Dow Jones believes more than a further US$50 billion will be added based on the estimation of Business Weekly.
JP Morgan's investigation shows most of the cash balances will be invested. But Standard & Poor's declared that about 35 percent of these funds will be invested in new projects or research and development.
The US passed the HIA to preventing their companies from shifting production to other countries with either low taxes or low costs. Although the World Trade Organization has judged the US move was illegal, the Act will still have a bearing on US investment.
The European Union (EU) has worked out a string of tactics to counter the HIA. For example, the EU has begun to increase tax on some products from the United States by 5 percent, increasing by 1 percent every month until the United States stops the enforcement of the HIA.
Also, it is urgent for China to work out its strategy to cope with this Act, since the country's economic growth depends greatly on foreign trade and funds.
As of November, China's total trade volume of imports and exports exceeded US$1 trillion, a year-on-year increase of 36.5 percent. Out of this total volume, imports were US$509 billion and exports were US$530 billion. The favorable balance of trade reached US$20.84 billion.
Among the country's achievements in foreign trade, foreign-funded enterprises in China have made contributions of US$596.21 billion, an increase of 41.8 percent.
The EU has remained the country's biggest trade partner over the past 11 months. The bilateral trade volume between China and EU was US$159 billion, increasing by 34.7 percent, accounting for 15.3 percent of the total volume.
And the Sino-US trade volume was US$153 billion, a 34.3 percent increase. The Sino-Japanese trade volume was US$152 billion, growing by 26.4 percent.
In addition, according to the Ministry of Commerce, more than 39,000 foreign-funded enterprises have been allowed to be established in China this year, increasing by 7.3 percent. More than US$135 billion of foreign funds will be invested in China, an increase of 34.36 percent. And more than US$58 billion of foreign funds is already in place.
The country's economic development depends on foreign trade and funds to a great extent. Companies from the United States have invested a great deal in China. And since most of China's export deals are processing contracts, among the country's export to the United States, much has been achieved by the US companies in China.
China's increasingly strong economy, on the one hand, has a louder say in the international market; on the other hand, the country needs to ward off more external risks.
In line with the estimates of the National Bureau of Statistics, next year, China can still maintain economic growth, but among the three major engines driving the economy, the growth of investment and exports might slow down.
Also, an official from the State Information Center said that China's foreign trade volume has doubled in the past three years, mainly because the international environment has improved after China's entry to the WTO and the depreciation of the US dollar. He estimated that the increased export margin will fall from this year's 35 percent to 15 percent next year. Meanwhile, the government will also control the growth of investment in order to rein in some overheating sectors.
Increasing consumption is the greatest hope in terms of driving forward China's economy.
JP Morgan also made a prediction about China's economy, saying next year, China will see its first trade deficit for many years. The unfavorable balance will be US$11.7 billion. If its prediction comes true, the increase in foreign trade and investment in China will be negative. How could China keep a high speed of economic development?
China's strong economic growth is due to two factors. One is the deepening reform, which encourages economic players to lower their costs. Another is increasing foreign investment and trade. The latter has been seen as a shortcut in many local officials' eyes to realizing fast development.
However, as a double-edged sword, foreign investment and trade should be introduced in a prudent way. Foreign investment does not always lend a helping hand to China's economy. When it reaches its climax, it will unavoidable go down, having a negative influence on China's economy.
For some foreign enterprises, after many years in China, they are playing an important role in China's market. Now both the United States and China have offered preferential policies for returning the profits back to the United States. The withdrawal of astronomical funds will influence China's economy.
In this way, China should control its dependence on foreign trade and funds. The basic way to drive forward the country's economy is stimulating domestic demands and developing domestic enterprises.
China's economic development should depend more on the domestic market. For a country with a large population and huge market potentials, domestic demands should be given priority when adjusting the economic structure to minimize the influence of fluctuations in the international economy.
(Business Weekly December 30, 2004)
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