Is China a US investor's dream?

China has 20% of the world's consumers. But is it a good investment?

With China's economic growth now on the wane and its consumer spending declining, the country's allure is diminishing even further in corporate America. Many of those who have invested in China complain that the business environment has fallen far short of their expectations. The Chinese affairs analyst James Miles looks at what's going wrong.

As China's economy boomed in the early 1990s, American and other foreign companies raced to join what China's Prime Minister Zhu Rongji once called the "gold rush." Investors felt that the market economy was truly taking root, and that it wouldn't be long before they could freely sell their goods to 1 billion consumers with plenty of cash in their pockets.

Fact v fiction

China's real GDP growth
Source: China's State Statistical Bureau

That was the dream. In practice, China has proved highly disappointing to many foreign investors. Bureaucracy, corruption, inflated prices, inadequate legal protection and intellectual property right violations are among a host of difficulties that investors continue to face, despite the official welcome that Beijing gives to foreign businesses.

Many investors are still prepared to tolerate such impediments in the hopes that their patience may pay off. By the end of September last year, there were 23,800 US-funded projects with a total investment of more than $16 billion. There was none two decades ago.

Any visitor to China can see why the country remains such a powerful magnet. American products are visible everywhere. From almost anywhere in central Beijing, a McDonald's fast food outlet is not far away. One of the biggest Kentucky Fried Chicken outlets in the world overlooks Tiananmen Square. Coca Cola advertisements line the streets. Things American are coveted by the nation's youth.

But look closer and the picture is more unsettling. The economic growth rate is declining. Millions are being thrown out of work as economic reforms begin to take their toll on state owned enterprises.

Urban poverty too is spreading. Many observers say that corruption is becoming ever more rampant. Last year, contracted foreign investment dropped by nearly 30 percent to just over 50 billion US dollars.

Bad timing

Foreign Direct Investment
Source: UNCTAD

This is a time when China desperately needs foreign funds. Its phenomenal economic growth in the last few years has been fuelled by its export performance, and export surge has relied heavily on investment from overseas. China has always tried to ensure that its foreign funded firms mainly make their money by selling abroad rather than at home.

China needs foreign investment too if it's to succeed in its push to privatise many of its state owned industries. This mammoth undertaking, however, is beginning at a time when foreign investors are treating Asia generally with more caution as a result of the currency crisis of the last few months.

Beijing says the United States is the second largest overseas investor in China after Japan. But this is because China does not regard Hong Kong and Taiwan as foreign. These two economies provide the bulk of hard currency investment - far more than Japan and America.

China may want to rely less on its hard-strapped Asian neighbours and turn more to America and other Western countries for funds. But it will be an uphill task