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China: FDI doubles despite tax concerns

Foreign direct investment (FDI) in China more than doubled last month from a year earlier despite concerns over the impact of increased corporate income tax on foreign investors which took effect this year.

Foreign direct investment in January was $11.2 billion, 109.78% more than in the corresponding month of last year, the Ministry of Commerce said yesterday. But its department of foreign investment administration declined to disclose the reasons for the unusual increase. The ministry said the government approved 2,918 foreign-invested enterprises last month, down 13.41% from a year earlier. In 2007, FDI rose 13.8% to $82.7 billion despite curbs meant to cool a boom in spending on real estate and other assets.

Lu Jinyong, a researcher at the University of International Business and Economics, attributed the big rise to possible funds in place for some major deals approved last year. The ministry has stopped releasing figures of contracted foreign investment, which are deals not fulfilled. “China is also attracting more foreign investors by further easing restrictions on mergers and acquisitions as well as improving the investment environment in the service sector,” he said. FDI inflows have surged since the country joined the World Trade Organization in late 2001. But many worried the corporate income tax law that took effect this year may hinder the influx of foreign capital.

Income tax rates for domestic and foreign companies are unified at 25% from this year, compared to 33% for domestic companies and 15% for foreign firms - which enjoyed tax waivers and incentives - before the change. “In the long term, the new corporate income tax law will benefit China in attracting FDI because it creates a level playing field for foreign and domestic investors,” Lu said. Many enterprises benefit from the new law as businesses involved in high-tech, infrastructure and environmental protection sectors and small-scale enterprises now enjoy a favorable tax, Li Zhiqun, director of the ministry’s foreign investment administration department, said in an earlier interview. He added that foreign enterprises registered before 2008 are given a five-year grace period of favorable tax rates.

FDI in non-financial sectors is expected to increase 4 to 6% year-on-year in 2008 to hit $69-$72 billion, according to a report released by the ChineseAcademy of Sciences. FDI in the non-financial sector increased 13.6% year-on-year to reach $74.77 billion last year. The report said FDI in the service sectors, including banking, insurance and retail, is expected to accelerate this year as China opens up these sectors wider to foreign investors. Dozens of firms register to compete to help develop (