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Fewer Foreign Devils

International Outlook


At first glance, the statistics are startling: Foreign investment in China dropped 50% in the first quarter compared with the same period in '93. But it's not as bad as it seems. For one thing, the new tax system, which trims preferential treatment for foreign investors, may be contributing to the falloff. There's also some heavy competition from the rest of booming Asia. Indonesia recently liberalized investment regulations, and Vietnam and India are opening up as well. Taiwanese interest flagged after 24 tourists from Taiwan were murdered in China on Mar. 31: Investment fell off 60% from a year earlier in April alone. Given China's growing labor unrest and skyrocketing property prices, some investors may indeed be having second thoughts.

But analysts say the picture for Beijing is hardly bleak. After all, 1993 was an extraordinary year: In that first quarter, investment hit $3 billion, a 167% increase from 1992. "The figures may have dropped 50% from the peak, but we're still talking about a lot of money," says a Western diplomat in Hong Kong.

Some also argue that the slowdown--and especially the tightening of tax breaks--could help squeeze out some of the shadier "foreign" investors. Chinese corporations often set up companies, called false foreign devils, in Hong Kong and Macao, which then reinvest money in China to be eligible for the tax breaks reserved for foreigners. "What we're seeing may not necessarily be a drop-off in `real' foreign investment," says a Hong Kong analyst. "It's a drop-off in Chinese companies that were taking advantage of an abnormal tax system." In Guangdong province, for example, investment from Hong Kong and Macao--places where Chinese companies are commonly set up--is down. But investments by companies from Britain, France, the U.S., Australia, and Thailand are up by over 50%.EDITED BY ELIZABETH WEINER By Joyce Barnathan in Hong Kong

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