China Imposes Brakes On Influx of Foreign Funds

JUST a year ago, Oei Hong Leong, an overseas Chinese investor from Indonesia, made a name for himself by throwing lots of money at risky state enterprises in China.

Mr. Oei's Hong Kong-based holding company, China Strategic Investment Ltd., snapped up 200 companies at bargain prices and spent $400 million streamlining them into beer, paper, and tire production businesses.

Today, amid Beijing's efforts to restrict credit and rein in inflation, many mainland enterprises are unable to collect debts and are hurting China Strategic profits.

``Financing these payments is increasing our interest costs and affecting profits,'' says Mico Chung, a China Strategic director in Hong Kong. ``The long-term problem with the state enterprises is the culture and mentality and how to change them into profitmaking ventures.''

Even as direct foreign investment pours into China, Chinese officials and foreign businesspeople admit the influx of foreign funds has peaked, and overseas business expectations of China are slipping.

Through October, China absorbed $25.2 billion in actual investment, a 44 percent jump over that period last year. But the number of new ventures fell 46 percent through September, and investment pledges fell 32 percent to $57 billion.

The decline has been particularly apparent among China's top two foreign-investment sources - Hong Kong and Taiwan - which account for 15 percent and 12 percent of China's overseas investment, respectively.

But land prices and labor costs in China are now escalating. Add to that worries about economic instability, mixed results from investments, murky government rules on rates of return and foreign-exchange guarantees, confusing tax laws, and a lack of legal protections, and it's no wonder Hong Kong and Taiwanese businesspeople are being drawn to Vietnam, Indonesia, and the Philippines.

Through this century, analysts expect foreign investment to average about $15 billion yearly, a slowdown from the surge of the past two years but ``still surprisingly high compared with many other countries,'' says Zhang Xiaoji, an international economist at the Development Research Center of the State Council, China's cabinet.

``China is currently at the high tide of attracting foreign investment'' and expected a slowing in planned investment, Mr. Zhang noted in a recent report in the official English-language Business Weekly newspaper.

BRAKING investment flows are the government tightening of credit, restored central-price controls, and other reverses of market reforms. With growth in output raging at 11.5 percent, and government forecasters projecting inflation to hit 20 percent this year, the government has targeted the helter-skelter influx of foreign investment as a cause of soaring price hikes.

Last week, prominent policy adviser Wang Zhenzhong accused foreign investors of feeding China's credit shortage. In a report by the official New China News Agency, he said foreign businesspeople are failing to invest the full amount of registered capital and then securing large domestic loans to close the gap.

Chinese officials, who report that more than half of the country's 100,000 foreign-funded enterprises lost money last year, contend that dodgy short-term investors are being replaced by more serious, long-term project managers.

But in Communist China, where foreign investment is controversial, such growing scrutiny plus inability to secure matching domestic funds are making businesspeople wary. Unpleasant surprises, such as talk of evicting McDonald's Restaurant from its prime Beijing location, underscores risks inherent in doing business in China. The city government and restaurant have reportedly reached an ``understanding,'' however, no further details are available.