China warms up the environment for its frustrated foreign investors

The past several years have not been easy for foreign investors in China. The list of complaints has grown long and is often cited with impatience: limited management authority for enterprises, a severe shortage of foreign exchange for purchasing equipment from abroad and for repatriating profits, welfare responsibilities that raise labor costs and hamper personnel policies, and unreasonable taxes and land-use fees -- to name some of the most common irritations.

The complaining reached a crescendo this summer, and even diplomats spoke openly about the problems in this Asian capital where everyone loathes confrontation. In August, Chinese Premier Zhao Ziyang directed that something be done. The foreign investment tallies for the first six months of 1986 had fallen sharply compared with 1985, and one joint venture, the Beijing Jeep Corporation, almost collapsed over the biggest investor complaint: the shortage of foreign currency.

So it was a long-awaited moment when on Oct. 11 the State Council offered its 22 provisions for encouraging foreign investment. The new rules were greeted cautiously, especially since they did not alter China's basic investment strategy: to use foreign capital to import advanced technology and to earn foreign exchange by strengthening the country's export base. Foreign businessmen point out that the strategy severely limits their access to China's vast domestic market by requiring, in most cases, that at least 70 percent of production be exported.

The new provisions aim to ease the burden of high operating costs for foreign businessmen and to set management free from bureaucratic practices that tie most Chinese-run enterprises up in knots.

But experienced analysts have said that they want to actually see the rules before concluding that the investment environment has improved. ``It's very encouraging,'' said one joint-venture manager here, ``but I'm also waiting to see the additional rules promised before year's end which expand on the original set.''

Chinese officials say they understand the concern about implementation.

By eliminating certain welfare payments, the rules reduce labor costs and permit companies to pay workers directly instead of through a state labor agency, which typically gives the worker a fraction of his earnings.

The rules giving management more autonomy affirm the right to recruit and fire without interference by state agencies. The rules also give priority to Chinese enterprises with foreign investment in obtaining services and bank loans. There is also a provision making it possible for these enterprises to trade currencies among themselves. But businessmen say this is only a minor improvement in what is likely to be an acute long-term shortage of foreign currency.

``As a whole, [the new rules] represent a more sophisticated awareness of the investor's problems, if not a firm grasp of the solutions,'' said Chris Brown of the National Council for US-China trade.

Whether the provisions reverse this year's declining investment trends won't be known for several more months. In the meantime, provincial and local governments are offering their own incentives, and some are more generous than the guidelines drafted in Peking.

In Shangdong Province, for instance, foreign businessmen investing in the province may now travel at Chinese prices (not at inflated rates for foreigners) and pay all their travel expenses in local currency (not in foreign exchange). The provincial governor has said that foreign manufacturers would have to export only 60 percent of their production.

It's not clear whether such provisions will stand up under central government scrutiny, but provincial authorities have been given flexibility to set their own rules, and some have recognized the competition among themselves for the foreign investment dollar.