According to the China Business Review (Jul/Aug 2010): 'As the drafting process for Chinas Twelfth Five- Year Plan (12th FYP) for Economic and Social Development (201 1-1 5) continues, a clearer picture of China's economic, industry, and social objectives - and the policy guidelines that will be used to achieve these goals - has emerged. The plan, which lays out national social and economic policies for the next five years, will focus on restructuring the country's economy to rely less on exports and fixed investment. Other policy objectives of the plan will include developing new energy sources, increasing energy efficiency in industry, and correcting imbalances in education, healthcare, housing, income distribution, and social security.'
Looking at the new 5 year plans as they develop can provide useful insights into understanding China's broad economic, investment and development objectives. When supplementing these with the changing investment and FDI within the country, intra-regionally and globally, they can be useful research inputs into law, accountancy and other professional service firms strategic thinking and planning processes (assuming they have formal or informal mechanisms in place to think about the longer term).
Internal Consumption and Changing Investment
One of the key facets of Chinas economy that has been discussed for some time is the over reliance on exports and the need for a consumption driven model of growth. The growth of consumer spending as a percentage of GDP is something the PRC government is supposedly actively developing and we are seeing greater investment developments (such as shopping malls) in regions within China not traditionally attracting significant investment.
2008 2000
Figure 1: Regional analysis of China FDI in 2000-2008
(Source: Dr. Liao Qun, China's FDI spread: sectoral and regional trends. Perspective, The Journal of ACCA Hong Kong, Autumn, 2009).
Figure 1 shows the movement of China FDI between 2000 and 2008. We can see that in percentage terms, central and western China FDI has doubled during the period. In fact, we now see many law firms taking an interest in so called second tier cities such as Chengdu, Tianjin, and Xiamen. The Pearl and Yangtze River Delta and the Pan Bohai Rim areas are also still hot beds of high end legal work as local organizations seek to realize their local and international growth aspirations. The increased investment between Chinese cities now means that domestic law firms have a significant advantage in location since foreign firms can only set up in a limited number of locations and must wait three years between opening offices, subject to passing this probationary period. Domestic firms are challenging international firms for large scale FDI work whilst boutique firms within the country are beginning to challenge the larger local firms in certain practices such as IP.
2008 2000
Figure 2: Sector analysis of China FDI in 2000-2008
(Source: Dr. Liao Qun, China's FDI spread: sectoral and regional trends. Perspective, The Journal of ACCA Hong Kong, Autumn, 2009).
Figure 2 shows how sectoral investment has changed during this period. We can see a substantial percentage drop in manufacturing and a significant increase in real estate as well as the finance and insurance sectors. Other service areas which are highlighted in Chinas new 5 year plan include outsourcing, e-commerce, logistics etc. Many businesses are looking for specialist advice in these industries and in house legal counsel are known to bemoan the fact that few firms have developed advisory capabilities in emerging industries. Law and accountancy firms would do well to look at these changing trends and think about building capabilities both in selected industries and reach. As MNCs continue to invest within China and Chinese firms also direct additional investment to their domestic markets it will be increasingly important for professional service firms to expand their reach within China, often through alliances. The recent merging of Baker Tilly and Chinese firm VICPA is a good example of this type of thinking. Since Hong Kong law firms, under CEPA, face no geographic restrictions in terms of the firms in China they can associate with, the attractiveness of CEPA and Hong Kong may grow as foreign firms increasingly look to the city to leverage the ability to win legal work involving the China market.
Infrastructure, Energy, and other Emerging Sectors
The Chinese government seems very concerned (at least openly) with alternative energy sources such as hydro, solar and wind power. Part of this is related to Chinas need to reduce its energy intensity and pollution levels. Rural areas in China are gaining importance as the government intends to reduce the income gaps between rural and urban areas, presumably contributing to not only a more stable environment but also spurring domestic consumption. China has recently said that it will spend up to US$1 trillion on infrastructure projects including road and rail. There will be considerable opportunities here for the AEC industry and there are already a number of well known architect firms from the west doing projects in the region. For example, KPF Architects (from the US) has signed roughly a dozen projects in China. Although not as heavily regulated as the legal industry, the AEC industry in China is still one where local knowledge and access to domestic experts who can sign engineering documents etc is an important process of getting work done.
The emerging alternative energy sector is not only growing within China since a number of Chinese firms involved in producing alternative energy technologies are making significant investments outside of China. A few law and accountancy firms have recognized this growing trend and built dedicated practices to serving alternative energy investments. Education is another sector receiving attention and this has included foreign education institutions. It is only in the last ten years or so that even Hong Kong universities have aggressively expanded into China by setting up joint programs with local institutions in addition to further education centres which are run on a for profit basis (HKU SPACE a prime example).
Bio technology is another sector receiving growing interest, not only in China but regionally (in particular Singapore). Again, a few professional service firms have set up dedicated practices for this sector by developing specialized expertise and building regional capabilities to tap the cross border investments in this area.
Inward FDI and Potential
The government approved the establishment of 1,866 overseas-funded ventures in January 2010, a year-on-year increase of 24.73 percent. FDI in January mainly flowed into the manufacturing sector. The sector attracted 48.65 percent of total FDI. Since the country first opened to foreign investment, China has received over US$1 trillion in outside investment. According to the Economic Times, to attract more foreign direct investment (FDI), China recently revamped its regulations to improve conditions for foreign companies while restricting funding for environmentally-unsound projects.
Under the new rules, FDI in high-tech industries, services sector, energy-efficient and environmental protection projects is encouraged, especially in the central and western regions. Qualified foreign-funded companies will also be allowed to go public, issue corporate bonds or medium-term bills in China. These regulations come as FDI flow rose to $23.44 billion in the first quarter of 2010 bucking the downturn during the past eight months.
Overall, there seems to be a number of developing trends that professional services firms wishing to benefit from China can leverage through some time spent on analysis and basic strategic thinking.

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