Journal of Financial Risk Management
2012. Vol.1, No.1, 1-6
Published Online March 2012 in SciRes (
Copyright © 2012 SciRes. 1
Investing in China: Opportunities and Risks in the Future
Yunhua Liu
College of Humanities, Art and Social Sciences Nanyang Technological University,
Singapore City, Singapore
Received February 2nd, 2012; revised March 3rd, 2012; accepted March 15th, 2012
Investment environment in China is changing due to the drastic change in world economic environment
and the intrinsic evolution inside the Chinese economy. Although China is facing a series challenges for
its further growth, a soft landing of the economy is expected. To meet the external and internal challenges
and to overcome the constraints for further growth, China has to transit the growth pattern which will
generate two areas of new demand, expansion of new industries for green economy and for resources
saving goals and promoting the purchasing power of low income group. Fast urbanization and moving to
the west are the other two major development opportunities. Risks and uncertainties in the coming time
could come mainly from the slowdown of external demand growth, the appreciation of Chinese currency,
the labor cost increase, domestic competition and product mimicking, resource supply constraints, and
trade disputes.
Keywords: Chinese Economy; Investment
Investing in China has been a luscious attraction to the world
investors in the past and will still be the same in the future.
Low production cost and large market are the two major con-
siderations among others for their business decisions. Recent
drastic changes in the world economic environment and the
intrinsic evolution in the Chinese economy however caused a
wide concern of the uncertainty of investment in China. From
investors’ perspective, we may ask: What has happened and
what will happen in the future to the investment environment in
As the world second largest economy, China is now facing a
series of challenges from the external and the internal to its
further growth. The major concern is the possible hard landing
from the previous steadily high growth trend. Clearly, fluctua-
tions from the Chinese economy may generate sizable impacts
to the rest of the world, and cause a doubtful expectation to the
returns of investment in China too.
The challenges from external are the slowdown of external
demand expansion for Chinese products from developed econo-
mies, the pressure of Chinese currency appreciation from huge
foreign exchange reserve, and the resources price rising due to
the money supply increase in the United States. Meanwhile, the
economic environment inside China has also changed substan-
tially. Labor cost increase, inflation pressure, environment de-
terioration, widening income gap and social stability are all
emerging as new constraints to China’s sustainable develop-
ment. The Chinese economy is now at a crossroad.
To overcome all the challenges and to keep the growth trend,
transition of the growth pattern in Chinese economy becomes
inevitable. Chinese government has announced a full plan to
cope with all the problems in its 12th five-year plan (2011-
2015), mainly focusing on the promotion of domestic demand
and upgrading the industrial structure.
Accompany with the policy changes and the economic envi-
ronment change, investment environment in China will cer-
tainly encounter some transformation. Different industries and
investments could be affected in a different way. This paper
tries to evaluate the possible impacts of these changes and to
illustrate what the major factors are which affect different as-
pects of business investments in the future. The rest of the pa-
per is organized as follows. Section two reviews briefly the
development policies and the performance of foreign direct
investments in China. Section three analyzes and evaluates the
changing opportunities and risks of investment in China in the
future. Section four concludes.
Development Policies and Performance of FDI
in China
The contributions of foreign direct investment (FDI) in
China’s thirty years fast growth have been well documented.
Direct effects include the provision of capital, new technology,
modern management skills and labor employment. Indirect
effects could be the spillovers of knowledge, skills, work ethic,
and so on (Fung, 2002). It was the complementarity of the
capital and technology hungry Chinese economy and the high
labor cost developed economies that generated the huge oppor-
tunity for FDIs in China under China’s new development strat-
egy, the open-door policy since 1978. Foreign capital was at-
tracted to China by China’s abundant cheap labor, cheap land
and other resources, plus all the policy privileges to FDI’s. The
main promotion policy for FDIs was the tax incentives and the
cheap land. FDIs enjoyed two years tax exemption and three
year tax reduction from the central government and could get
the cheap land from local governments. By the end of 2010,
however, all the tax incentives had phased out except some
special industrial sectors. Cheap land is no longer available in
the developed coastal areas and big cities. The past thirty years
has witnessed the process of maturity of China’s FDI policy
management, improvement in regulations and changing cultural
environment favoring the foreign investment. In the last decade,
China has maintained to be the main destination of FDIs in the
world (Table 1). In 2011, the newly establishment of foreign
enterprises were 27,712 in non-financial sectors, mainly in the
sectors of manufacturing and real estate. The foreign capital
actually utilized was 116.0 billion US dollars, up by 9.7 percent
(China Statistical Communiqué 2012, see Table 2).
Policies and prescribed opportunities however could not
guarantee the success of business. FDIs in the initial stage in
China’s development experienced various difficulties in han-
dling all the problems of the unclear policies, unfriendly cul-
tural environment, shortage of infrastructures, shortage of
skilled labors and shortage of management skills. Opportunities
were plenty, the challenges were harsh too. Failures were not
uncommon, even for large investment such as Beijing Jeep
project invested by the American company in 1980s (Vanho-
nacker, 2004).
The performance of FDIs on their investment profitability in
China has however a clearly good record. High return is a must.
A few survey results showed us the performance of the FDIs in
profit returns on the capital and the percentage of satisfaction of
their investment in China. The survey conducted by US-China
Business Council 2011 on China Business Environment indi-
cates that 60% of their member companies have the profitabil-
ity rate in their China operations better than the global rate and
more than 80% of the US companies were profitable in the past
six years (Figure 1).
Although some favourable policies toward FDIs phased out
in 2010, government pro-investment policies are not changed.
New supportive factors and new challenges are both appeared
in the new era. In next section, we will examine what changes
are happening in China’s investment environment, and how
these changes affect the investment opportunities and risks in
the future.
Investment Opportunities and Risks in the
Both the macro development trend and specific areas in
China’s investment environment are changing. In this section,
we summarize briefly first the macro trend in Chinese economy
and government policy, the changes in specific areas for in-
vestment, and we then analyze in detail how these changes
form opportunities and give rise to risks for investment in the
Table 1.
Foreign direct investment in China 2001-2009.
Year Total Amount of
Contracted Foreign
Total Amount of Fore ign
Investm ent Actually
Utilized, US $100 million
2001 26,140 496.72
2002 34,171 550.11
2003 41,081 561.40
2004 43,664 640.72
2005 44,001 638.05
2006 41,473 670.76
2007 37,871 783.39
2008 27,514 952.53
2009 23,435 918.04
1979-2009 684,918 11,416.22
Source: China statistical yearbook, 2010.
Table 2.
Total value of foreign direct investment in non-financial sectors and the growth rates in 2011.
Sector Enterprises
Increase over
2010 (%) Actually utilized value
(100 million USD) Increase over
2010 (%)
Total 27,712 1.1 1160.1 9.7
Of which:
Agriculture, Forestry, Animal Husbandry and Fishing 865 6.9 20.1 5.1
Manufacturing 11,114 0.6 521.0 5.1
Production and Supply of Electricity, Gas and Water 214 1.9 21.2 0.3
Transport, Storage, Post and Telecommunication Services 413 4.3 31.9 42.2
Information Transmission, Computer Services and Software 993 5.1 27.0 8.5
Wholesales & Retail Trade 7259 7.0 84.2 27.7
Real Estate 466 32.4 268.8 12.1
Leasing and Business Services 3518 2.9 83.8 17.6
Services to Households and Other Services 212 2.3 18.8 8.2
ational bureau of statistics of China, February 22, 2012, statistical communiqué of the people’s republic of China on the 2011 national economic and social development.
Copyright © 2012 SciRes.
Figure 1.
US profitable firms in China. Source: US-China business council sur-
vey, 2011.
The Changing Environment in Macro-Trend and in
Specific Areas
Thirty two years fast expansion has provided with tremen-
dous investment opportunities to investors in China. Now the
concern is whether the Chinese economy can achieve a soft
landing under the challenges from the external and from the
internal. A wide believe among the scholars from domestic and
overseas is that the possibility of soft landing is larger. The
supportive evidences include the strong supplies of basic
growth factors such as labor, capital, technology, and creative
research ability. China has the world highest national savings
rate of almost 50% in the last decade. China still has about 40%
labor employed in agricultural sector among them at least half
could be released to industrial production. The needed tech-
nologies could either be purchased from developed countries or
developed by China. Figure 2 shows the growth rates and ab-
solute amount of GDPs of China for the past six years. The
steady high growth trend and the fast enlarging absolute scale
(US $7368 billion) are very impressive.
To meet the challenges that the economy faces now the Chi-
nese government has announced the new strategies of transiting
the development pattern by promotion of domestic demand to
balance the over-relying on external demand and by upgrading
the industries to control the deterioration of environment and to
reduce the heavy consumption of energy and other natural re-
sources. A series of domestic demand promotion policies have
been put in use, including reforms in housing policy to help low
income people, increasing education subsidy, expanding medi-
cal care and social security coverage to rural areas and to low
income groups in urban areas. Industrial upgrading strategy is
targeting the seven strategic new industries such as energy sav-
ing industry, new generation of IT industry, biotech industry,
high end equipments, green energy, new materials, and new
energy automobiles. If all these measures were accomplished
effectively, a soft landing of the economy and a good new
starting point for sustainable growth would be possible.
Some researchers, for example, the Economists Intelligence
Unit forecasted an expected moderate growth of about 6% - 8%
for the Chinese economy for the coming five years as shown in
Figure 3, which is similar to the growth target of the Chinese
To investors, though some traditional cost saving factors
have disappeared, such as the cheap labor and land, tax incen-
tives and good locations, some other new cost saving factors
are emerging. These new factors include substantially improved
infrastructure, large scale in production, good linkage of indus-
tries, better labor quality and more available professionals, still
abundant labor and land, and other natural resources. Further,
the market scale in China has been enlarged much bigger than
before due to the income increase. The last, but also a very
important factor is the strong local government support to in-
dustrial development in China all the time.
Meanwhile, investors in China need also to face the newly
appeared problems such as the tightened social tension due to
widened income gap and less hard working new labor hands in
addition to the long standing ineffective legal system.
The Opportunities
The strategy of development pattern transition in Chinese
Figure 2.
China’s real GDP and growth rates 2006-2011. National bureau of
statistics of China, February 22, 2012, statistical communiqué of the
people’s republic of China on the 2011 national economic and social
Figure 3.
The expected moderation of China’s growth. Source: Economist intel-
ligence unit.
Copyright © 2012 SciRes. 3
economy will facilitate two big areas of development, promot-
ing the seven new industries and balancing the widened income
gap. Industrial structure upgrading involves government in-
vestments, subsidy and research support to the new industries
production and to the use of the related products. This policy is
more oriented to the developed coastal areas and big cities. The
promotion of domestic demand involves enhancing the con-
sumption power of low and middle income groups. At the same
time, consumption goods and markets related to the majority of
low and middle income groups will flourish.
Another long standing and large scale influential demand
area is the fast urbanization in China. In 2011, the urbanization
rate of China reached 50%. In coming twenty years, there could
be another 25% of the total population becoming urban resi-
dents from the rural areas. That means another three hundred
and fifty million population movement. The Chinese govern-
ment recently announced a new policy to loose the control of
household registration system. At the county level, the old ur-
ban and rural two-status household system is abolished and at
the large district level, farmers can conditionally move in urban
areas without the barrier of registration. This new policy will
certainly speed up the urbanization in medium and small cities.
Construction industry and urbanization related products in these
areas will be in a bigger demand.
The fourth major demand in China is the new movement to
inland and western areas. Opening up the inland and western
areas this time could be very much different from the case of
early 1990s when the government made a big plan of invest-
ment, but the consequence was not significant. The faster
growth in inland areas recent years in the provinces such as
Jiangxi, Hunan, Hubei, Henan, Chongqing and Sichun evi-
denced the capital flows driven by the market force. The gov-
ernment policy of promoting inland development is matching
the market movement this time. This will form the new trend in
locality for investment.
The Risks and Uncertainties
With the various changes in economic environment and the
policy changes from governments, some risks and uncertainties
for investment certainly exists. The changing areas which may
generate risks and uncertainties include the slowdown of the
external demand growth, pressure of Chinese currency (RMB)
appreciation and inflation, labor cost increasing, domestic
competition and mimicking products, constraints of resources
supply, and the trade disputes. We will see how the changes in
these areas possibly give rise to risks and uncertainties in in-
vestments in the following.
Slowdown of the external demand growth. Exports have
been a major driving force second to investment in Chinese
economy for the past twenty years (see Table 3). In 2011, China’s
exports reached US $1898.6 billion. The majority of China’s
exports are manufacturing goods, accounted for 95% of the
total. Among it, 60% of the exports are related to foreign direct
investment companies. Slowdown of the external demand
growth will limit these firms potential in the future. There are
three factors which will limit the further expansion of China’s
exports. The first one is the slow recovery in developed econo-
mies. The very slow recovery of the US economy and the un-
certainty of EU debts problem showed that these traditional
large demanders for Chinese products will not be able to return
to the normal track in the near future. The second factor is the
large base of China’s exports. In 2010, China’s exports reached
US $1477 billion, surpassed EU to become the world largest
exporter, accounting for 14.8% of the world total exports. The
world market does not have further potential to absorb a faster
increment of China’s exports.
Pressure of RMB appreciation and inflation. Steady appre-
ciation of RMB will definitely erode the advantage of some
export firms. As mentioned above, these firms are more foreign
direct investment ones. The pressure for RMB to appreciate
Table 3.
China’s exports, imports, change, and trade balance, 2000-2011.
Exports Imports Surplus
US $100 million % US $100 million % US $100 million %
2000 2492 27.9 2250 35.8 242 17.1
2001 2662 6.8 2436 8.3 226 6.6
2002 3256 22.3 2952 21.2 331 46.5
2003 4384 34.6 4128 39.8 256 22.7
2004 5934 35.4 5614 36.0 320 25.0
2005 7623 28.5 6602 17.6 1021 219.1
2006 9689 27.1 7915 19.9 1774 73.8
2007 12,205 26.0 9561 20.8 2644 49.0
2008 14,307 17.2 11,326 18.5 2981 12.7
2009 12,016 16.0 10,055 11.2 1961 34.2
2010 15,778 31.3 13,962 38.9 1816 7.4
2011 18,986 20.3 17,435 24.9 1551 14.6
Source: China statistical yearbook 2011, and China’s statistical communiqué 2012.
Copyright © 2012 SciRes.
from the major trade partners of China, the developed econo-
mies, has been a long standing issue. They strongly believe that
the rate of RMB is under valued which created the export ad-
vantage for Chinese firms. The evidence is the huge foreign
exchange reserve that China accumulated over the past time
and the persistent large amount trade surplus. The reserve in the
end of 2011 was about US $3200 billion. The trade surplus has
been maintained around US $200 billion annually since 2007.
In last three years, the surplus showed some declines.
Appreciation of RMB is on a clear trend. From 2005 to 2011,
RMB has appreciated 31.7%. A prediction by Tan 2003 for
RMB rate is shown in Table 4. Up to now in 2012, the rate is
US $1 = RMB 6.3. The predicted value of Tan is very close to
the current trend. With such a steady trend of appreciation of
RMB, affected firms could be the exporting firms and the low
profit margin firms.
The concern of inflation appeared since 2010 after the huge
stimulation plan during the 2008 crisis. Surplus of money sup-
ply due to the expansion fiscal policy and the huge foreign
exchange reserve created the possibly long standing inflation
pressure, which could similarly erode the advantages of export
firms in China.
Labor cost increasing. Labor cost increasing and labor
shortage in coastal areas and in big cities become a common
phenomenon in recent years. In fact the labor wage increase is
partly due to the inflation. We may view the so-called labor
shortage as a market adjustment process in the new economic
environment rather than an arrival of real labor shortage be-
cause from the potential labor supply to the actual labor wage
in China, it is far from a real labor scarce country. The firms
which have been relying on cheap labor need to adjust, while
the other firms are not necessarily in such a situation. After all,
labor abundant is still a major characteristic of China’s resources
endowments. Table 5 provides a comparison of the labor cost
Figure 4.
Historical exchange rate of RMB, RMB/US $. Source: China statistical
Table 4.
Prediction of the appreciation of Rinminbi.
2003 8.3
2005 8.1
2015 5.8
2025 2.8
Source: Tan, China development report, 2003.
in manufacturing in different countries. Obviously, the labor
cost in China is still at the very low end.
Competition from domestic and mimicking products. A
very widely complained business wrong doing by foreign in-
vestors in China is the ineffective protection of intelligent
property rights. Even though the situation is improving, another
fact is that Chinese people showed a very fast learning ability
for the technology and the design of the foreign products. That
means products with the feature of easy target for mimicking
will face a quick appeared competition.
Environmental policy change. The energy and resources
saving regulations from the government new policy will have a
sizable impact to the firms who are not able to adjust and meet
the requirements. The situation in China is that in many locali-
ties the enforcement of the old environmental regulations might
not fully carried out. Due to the visible environmental deterio-
rations and increasing pressure from the public, the enforce-
ment and more strict regulations will be in use. The firms in
such a situation will be corrected, as we may have read from
news of the pollution paper industries in the upper Yangzi river
Constraints of resources supply. The supply of energy, wa-
ter and minerals in China becomes increasingly pressured. Ac-
cording to the data of International Energy Agency, China sur-
passed US becoming the world largest energy consumption
economy in 2009, total energy consumption of oil in 2009 was
estimated to 2265 tons (Table 6). Though 70% of the energy
supply in China is from coal, the daily average need of oil im-
port is more than 500 barrels. Oil price increase due to the po-
litical tension of Middle East with the western countries puts a
big uncertainty to the large energy consuming industries and
firms in it.
Water supply in China is potentially an even serious problem.
The recent official report (Shanghailist, 2012) indicates that two
thirds of the Chinese cities have the problem of water shortage.
North and western areas in China are the traditionally water
scarce areas. Big and medium size cities water shortage be-
comes an uncertain constraint for the future development of the
Table 5.
International comparisons of hourly compensation costs in US dollars
in manufacturing, 2010.
Norway 57.53 United Kingdom 29.44
Switzerland 53.20 Spain 26.60
Belgium 50.70 Singapore 19.10
Denmark 45.48 Korea, Republic of 16.62
Sweden 43.81 Argentina 12.66
Germany 43.76 Hungary 8.40
Australia 40.60 Taiwan 8.36
France 40.55 Poland 8.01
United State s 34.74 Mexico 6.23
Italy 33.41 China* 2.00
Japan 31.99 Philippines 1.90
Source: United Nations department of Labor, *China’s
data is from China statistical yearbook, 2010.
Copyright © 2012 SciRes. 5
Table 6.
Total energy consumption: US and China (Million tons of oil equiva-
US China
2000 2270 1107
2001 2228 1104
2002 2254 1193
2003 2260 1356
2004 2306 1576
2005 2317 1707
2006 2295 1865
2007 2333 1977
2008 2281 2131
2009 (e) 2169 2265
Source: IEA.
city and the industries there. Heavy water use investors should
be aware of the potential water shortage problem for a specific
investment location.
Trade disputes. Trade disputes between China and the de-
veloped economies occur more frequently in recent years. Al-
though trade disputes of China with other nations are not a
daily matter for every industry, the uncertainty for certain firms
however increased.
Investment environment in China is going to change signifi-
cantly due to the world economic environment change and the
intrinsic evolution inside the Chinese economy. Many new
challenges and different opportunities to investors are emerging.
The main direction of the changes comparing to thirty years ago
however is much clearer. An improved investment environment
full with opportunities in China is appearing. The uncertainties
and the challenges however need the investors to manage and to
overcome with creativity.
China Statistical Yearbook, various years.
China’s Statistical Communiqué (2012).
Economist Intelligence Unit (2010).
Fung, K. C. (2002). Foreign direct investment in China: Policy, trend
and impact. Working Paper. Santa Cruz, CA: University of Califor-
Lu, H. (2012). Two thirds of Chinese cities face water shortages.
Shanghaiist News.
Tan, K. Y. (2003). China development report, seminar report. Singa-
pore City: Nanyang Technological University.
United Nations Department of Labor (2010).
US-China Business Council (2011). China business environment sur-
vey results.
Vanhonacker, W. R. (2004). The China casebook. Singapore City:
McGraw Hill Education.
Copyright © 2012 SciRes.