Investment Risk in Post-Deng China

Spot Survey


March 1995

After Deng Xiaoping, who is reportedly seriously ill, the current administration, led by General Secretary Jiang Zemin, will retain power in China. Though any major policy shifts are unlikely until 1997, further restrictions may be placed on foreign investment to counter inflation.Moreover, as there is a possibility of political upheavals arising from power struggles, potential investors in China should be able to manage these risks.

China has recorded double-digit economic growth for three consecutive years since 1992, when Deng called for reforms and a more open stance to the outside world.Investment from foreign countries more than doubled both in 1992 and 1993, causing an investment boom.Much of this has been attributed to the Deng Xiaoping-Jiang Zemin policy of economic management.

At present, Jiang and the other top leaders are consolidating their power bases. Deng's influence is rapidly fading from the centers of political and economic power. There is a strong likelihood that the Jiang administration will continue in the post-Deng era, provided a balance is maintained in the collective leadership. The administration may last until the next Congress of the Communist Party of China, that is, the 15th Party Congress scheduled for 1997.

The biggest problem faced by the Jiang administration is inflation. At the end of 1994, inflation exceeded 25 percent. If it remains in the 20 percentile range, the authorities will be forced to take severe austerity measures, which may trigger a great recession or increased unemployment. There are concerns that the government will start restricting foreign investments further to prevent this from happening, for example, by imposing fiscal constraints or by abolishing tax incentives in the Special Economic Zones.Another notable problem is the fact that conflicts over policy issues could develop into power struggles, setting off political turmoil.

Sino-Japanese relations have been marked by serious investment by Japanese manufacturers in the automobile and other industries in China, one aim being to realize a China in the 21st century where passenger cars are popular. The future will see the formation of a horizontal international devision of labor with China. Companies investing in China must have the ability to manage risks, for example, by obtaining better access to information, particularly in view of the lack of transparency in China's foreign investment policies.

"The Changing Investment Environment in China, " / Maruyama, Nobuo

"Political Stability in the Post-Deng Era, " / Onishi, Yasuo

"Can Inflation Be Overcome?" / Ishihara, Kyoichi

"Transition to a Market Economy -Difficulties in Reforming State-Owned Enterprises, " / Marukawa, Tomoo

"Hong Kong and Taiwanese Approaches to China, " / Sawada, Yukari; and Sato, Yukihito

"Appendix: The Chinese Economy -An Outlook for 1995, " / Watanabe, Mariko