China out to revive US capital inflow

The excitement, the potential, the spell of the Orient - they were all there in the rush of American businesses into China in the early 1980s. But then came the red tape, the unfulfilled promises, the shifting regulations - specifically, a tightening up by Peking on access to crucially needed foreign exchange.

Investment by American business in China has fallen 42 percent this year (although that comes after a record year in '85, when, with $8.2 billion, the United States accounted for 12 percent of the China trade - No. 2 after Hong Kong).

``A lot of the enthusiasm - the great hordes of people going to China to invest - has dissipated,'' says Gerald Gleason, vice-president of the Foxboro Company, a Massachusetts producer of industrial controls and partner in a Shanghai joint venture.

Chinese authorities recognize this, however, and have set in motion sweeping changes in foreign investment regulations to try to entice American business anew.

Roger Sullivan, chairman of the National Council for US-China Trade, says Chinese officials are working on a 14-point list of liberalized investment guidelines. These include provisions to balance foreign exchange, promote import substitution, and give preferential treatment to advanced technology.

The new regulations should be issued by March, Mr. Sullivan says. The quick time frame is a ``dramatic indication of commitment'' by Peking.

Sullivan, a former Foreign Service officer in China, sees this as a ``significant turning point.'' He says Chinese officials he recently conferred with recognize the need to continue to attract foreign investors for the country to continue to develop. In the process, he says, they have bought two important notions.

The first is that ``import substitution'' is the functional equivalent of earning foreign-exchange dollars, since it saves foreign exchange. Thus joint ventures operating in China should not be required to export in order to generate the foreign exchange they need to import raw materials or components.

Many of the US investors, says Mr. Gleason of the Foxboro Company, have enough capacity in the world and don't need exports from their China operations.

The second notion, Sullivan says, is that foreign exchange is needed by joint ventures for operating reasons - and is not simply a way for joint foreign investors to repatriate their profits.

A recent study of 35 key companies by the World Bank's International Finance Corporation found that availability of foreign exchange was the most important factor in doing business in China. Labor relations were next on the list, followed by issues such as operating costs, intellectual property rights, and the life span of joint ventures.

If the new investment regulations are as liberal as Chinese officials have indicated, Sullivan says, ``I'm very sure that investment negotiations will increase in 1987.''