China will not drop its preferential policies to attract foreign investment despite the fact that World Trade Organization (WTO) rules specify that foreign and domestic firms should be treated the same.

Hu Jingyan, director-general of the department of foreign investment administration under the Ministry of Commerce, said China has no plan to change its preferential treatment policies for foreign investment in the near future.

Hu made the remarks to reassure foreign investors who have been worried that China might cancel its preferential policies and give foreign investors the same national treatment as their domestic counterparts now that the country is in the WTO.

"This is a result of their misunderstanding of what is meant by 'national treatment," Hu said. In line with the WTO rules, national treatment means the elimination of policies that discriminate against foreign investment; it does not necessarily mean elimination of preferential treatment.

On the contrary, the Chinese Government will establish more preferential policies to promote foreign investment, particularly investment by multinationals, Hu said.

For example, China will allow the creation of foreign-funded, even solely funded, logistics companies, to improve the poorly operated domestic logistics industry.

The ministry is also studying preferential policies for foreign-funded purchasing centers and research and development centers, which will be put into practice soon.

However, the trend in China will be to level out its treatment of foreign and domestic companies, Hu added.

"But that is the long-term target, the government will not drop its preferential policies immediately," Hu said.

Many local enterprises have complained about the preferential treatment given to foreign-funded companies, saying their competitiveness is weakened by these policies.

Foreign companies are not required to pay tariffs and value-added tax when importing equipment for their own operation.

They also enjoy a lower corporate income tax rate.

Considering preferential policies and other incentives, China's actual corporate income tax rate is estimated at 26 percent for domestic firms and 15 percent for overseas-funded firms.

Local companies argue that national treatment not only means that the government must open more areas to foreign investment, but also means that it must level out differences in treatment.

However, Zhao Jinping, an expert on foreign investment from the Development and Research Centre under the State Council, said these local companies should be looking at the macro environment.

"The elimination of preferential treatment for foreign investors will lead to a slowdown in the increase of foreign direct investment (FDI), and even a drop, which will have a negative impact on the country's economic development and industrial adjustment," Zhao said.

"Therefore, we should keep stable consistent policies on foreign investment."

Even when the time for dropping such policies is ripe, the change should be made gradually, Zhao said.

After 25 years of tireless work in attracting FDI, China has a larger scope and a more orderly investment structure to encourage foreign funds, and the quality of investment from abroad is improving continuously.

To date, more than 400 of the world's top 500 companies have launched operations in China, of which nearly 30 have set up regional headquarters.

FDI in China hit a record high last year, outpacing the United States to rank first in the world for the first time.

The country's actual foreign investment in 2002 exceeded US$52.7 billion, a year-on-year increase of 12.51 percent, despite a decline in global FDI investment.

Ma Xiuhong, vice-minister of commerce, said earlier FDI in China is expected to total about US$57 billion this year, US$4.3 billion more than in 2002.

(China Daily October 8, 2003)