China still a top destination for foreign companies

Despite China's rising labor costs and an economic slowdown, the world's second-largest economy remains attractive to foreign investors

Don't talk to Kevin Thieneman about the economic slowdown and rising labor costs in China, Caterpillar Inc's head in China is mulling over the long-term development blueprint in China for the world's largest maker of construction equipment.

Although "the industry is slower this year than last, our long-term view for China is unchanged", said Thieneman in an interview with China Daily.

"We are as optimistic and bullish about China today as we were 24 to 36 months ago."

Hurt by eurozone debt woes and affected by property tightening policies, China's economic growth has been decelerating this year, with the expansion slowing to 7.6 percent in the second quarter, the slowest pace in more than three years.

To some extent, the disappointing economic figures seem to have dampened foreign investors' confidence in the world's second-largest economy, which has been the most attractive foreign direct investment destination among developing economies for over a decade. This July saw the eighth monthly drop in FDI in nine months.

But for the Chinese government, such a drop is a temporary phenomenon, and the Ministry of Commerce, the agency in charge of the nation's inbound and outbound investment, has repeatedly said "China is, in the long term, a most attractive market for foreign companies".

Multinationals including Caterpillar cannot agree more.

As infrastructure construction decelerates and demand for machinery equipment shrinks in China, industrial companies including Caterpillar are facing a difficult period. Caterpillar has even started exporting Chinese-made machinery to the Middle East and Africa to offset the slackening growth in China.

Still a key priority

But such a move will not last and is not part of the company's overall China strategy, it insists. It's true that "we are slowing down production and capacity expansion to address customer demand, but (we are) not stopping, halting or reversing our plans", Thieneman said.

"China is still a key priority for Caterpillar. We remain very positive on long-term industry growth in China and our strategy to grow our business here."

In July, Caterpillar and Guangxi Yuchai Machinery Co Ltd jointly announced the official opening of a new manufacturing facility in Suzhou, Jiangsu province.

And Thieneman will soon start preparing for, Bauma China 2012, a leading international trade fair for construction machinery and vehicles, due to take place in Shanghai in November, of which Caterpillar is expected to be a prominent participant.

Thanks to China's competitive labor costs and the policy of reform and opening-up, China grew into a hot spot for foreign investors before the financial crisis in 2008.

The United Nations Conference on Trade and Development has ranked the nation as the most appealing investment destination for over 10 years.

But as China adjusts its foreign investment policy toward targeting high-end manufacturing, services and green industry as it strives to transform its economic growth model, some foreign companies have started to complain about its business climate in the past two years. And as the nation's labor costs rise rapidly, some have even moved their factories out of China.

What is worse, the eurozone debt crisis has affected the global flow of capital.

But these complaints or examples of hesitation are isolated cases.

"The Chinese economy is going through a rapid evolution ... a huge amount of change at one time, so it is natural that it causes some dislocation and turbulence along the way," said Peter Sykes, Dow Chemical Co's president in China.

The US-based company is the world's largest specialty chemical company by sales.

"Huge new opportunities will present themselves as the economy becomes more sophisticated. At Dow we remain very excited and we believe China will continue to serve as an important engine of growth for Dow and others — but a different kind of engine. "

Although some foreign companies are delaying their investment plans in China, Dow is beefing up its operations in the nation.

In June, Dow said it would invest in a world-class manufacturing facility on water treatment technologies in Huzhou, Zhejiang province. The new facility will become operational in 2013.

The company is also planning to expand its electronics manufacturing facility in Zhangjiagang, Jiangsu province.

Sykes said that Dow will continue to invest to further expand its manufacturing, innovation and operational networks in China over the next few years.

For Dow, the Chinese market is certainly a good bet. "If China continues its impressive track record of economic success, it will eventually become Dow's largest global market, most likely sometime in the 2020-30 period," said Sykes.

After the figure expanded by more than 10 percent for years, China's GDP growth slowed to 7.6 percent from April to June, the slowest pace in three years, but some economists say it has yet to bottom out.

Bank of America, Deutsche Bank and HSBC recently reduced their forecasts for full-year economic expansion. Premier Wen Jiabao in March set a target of 7.5 percent for this year.

But many foreign companies are taking a long-term view. China's economic growth will probably recover late this year or early next year, as the Chinese government continues to stimulate growth, said Thieneman from Caterpillar.

Wang Zhile, a senior expert with the multinational company research institute under the Ministry of Commerce, said "it's unnecessary to be that concerned about the drop in the nation's FDI", as "the real estate sector is probably a key factor behind this".

As the realty sector grew speedily in China, the nation witnessed a huge influx of foreign funds into the sector over the past few years. But, with the central government's tightening measures in the property sector, China saw a sharp decline in the amount of foreign capital flowing into the industry.

Of the 5.08 trillion yuan ($800 billion) invested in property development in China between January and July, only 22.8 billion yuan was made by foreign investors, a 54.3 percent decrease year-on-year, according to the National Bureau of Statistics.

"We actually have not felt any big change with foreign companies and manufacturers in sectors excluding realty," Wang said.

"The confidence is there."

After years of double-digit annual growth, China's FDI reached a record high of $116 billion in 2011. "The annual figure is expected to surpass $100 billion in the future, and annual growth could remain around 10 percent on average in the next decade."