Report: South China, Led by Guangdong, Best Place for FDI in China

South China, led by Guangdong Province, continues to be the best location for foreign investment in China, according to reports released by The American Chamber of Commerce in South China (AmCham South China).

The study shows that an overwhelming majority of companies consider the current business environment in South China to be "good" or "very good.”

The AmCham’s 2017 White Paper on the Business Environment in China argues that a shift in the investment practices of multinationals has begun and China must realize that, in order to not just attract foreign investment but to retain foreign and Chinese investment in China, it will need to seriously compete with overseas destinations and begin to offer truly attractive incentives which would finally put China at par with other global players, according to a white paper.

Meanwhile, the 2017 Special Report on the State of Business found that 77.2% of participants reported that their primary business focus was providing goods or services to the Chinese market, while only 22.8% reported a primary focus of manufacturing for export.

At the same time, a similar majority proved to harbor positive sentiments towards the China market, replying that they feel "slightly optimistic" or "optimistic" about the economy.

The study shows that in 2017 AmCham South China members have budgeted to reinvest, from profits, US$12.6 billion to expand existing operations in China, a 4.12% decline from 2016.

Stark cause for grave concern

The results of this year's study present a stark cause for grave concern about the state of the Chinese economy and its current trajectory. This is clearly evident when reviewing the result of one of the new questions included in this year's Study, which stated: "Did your company shift any planned reinvestments to other markets?"

In 2016, although 29.9% of respondents reported no shift, 13.3% of wholly foreign-owned enterprises, 11.4% of joint ventures, and 26.67% of representative offices of foreign enterprises, representing a substantial number of respondents, replied that they had shifted some reinvestments to other Asian, ex-China destinations.

Among the Chinese company respondents, a significant percentage (17.6%) said that they had moved some reinvestments overseas to other Asian destinations. Approximately 30% of respondents cited rising operational costs in China as a major driving factor for diverting reinvestment to other destinations.

Other major factors named were the perceived uncertainty of market prospects in China, more attractive opportunities in competing destinations outside of China and the fierce local competition in China due to an uneven playing field.

Cancelled reinvestments

The study further reveals that in 2016, 50% of multinationals with existing operations in China cancelled their reinvestments of US$250 million or more, while at the same time, doubling their reinvestments in the lower categories of less than US$250 million.

Also for 2017, 50% fewer multinationals have budgeted reinvestments in the US$250 million or more category than last ­year. However, they have at the same time, doubled their 2017 budgets in the reinvestment categories of less than US$250 million.

This trend suggests that executives on the ground in South China have maintained a high level of confidence in the future of the China market and are investing amounts within their decision-making ability.

Executives at corporate headquarters, however, appear to be deferring large investments which require their sign-off.

“We predict that the cancellation of larger reinvestments in 2016 and reduced reinvestment budgets for 2017 will translate into reductions in China's exports in 2018 and 2019,” says AmCham South China.

The study also shows China is currently paying the price for a situation which occurred in 2014, the perceived "targeting" of foreign-invested enterprises.

“At the end of 2014, our Special Report, released in March 2015, revealed that 25% of multinationals with existing operations in China postponed or cancelled their investments of US$250 million or more,” says the group.

The 2015 study showed a 9.3% reduction in planned reinvestments by AmCham member companies; more devastatingly, the same Study revealed a 16.9% reduction in planned reinvestments for a three-year period from 2015.

Looking at export numbers for 2016, while total Asian exports (ex-China) grew by above 7% year on year, China's exports remained sluggish at around -7%. Most reinvestments in factories require 2 to 3 years for construction before producing goods.

Given that the above-mentioned postponed or reduced reinvestments would have produced goods for exports in 2016 - and keeping in mind that more than half of China's exports are produced by foreign invested enterprises, it can be deduced that those investments were shifted to other parts of Asia from China and are now producing exports for those countries.

 

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