SEVERAL ISSUES REGARDING ATTRACTING FOREIGN INVESTMENT1
JULY 15, 1989
Several issues surrounding foreign investment in Shanghai merit close attention.
1. The Direction of Foreign Investment
As Deng Xiaoping has pointed out, incurring some foreign debt to improve infrastructure can also be considered part of reform and opening up. The question now is how to do it, which areas to open up and which to keep closed. Since coming to work in Shanghai, I’ve devolved the authority to review and approve foreign-invested projects, simplified procedures, and formed a “one-chop shop”—the Municipal Foreign Investment Commission—to motivate foreigners to invest in Shanghai. Work in this area has achieved results, but some shortcomings have also come to light, especially since we devolved review and approval powers to the districts and counties and foreign-invested projects went around the departments in charge during the review process. Negative phenomena appeared, such as redundant technology imports, increased pollution, takeover of markets [from Chinese companies], and competition with state-owned enterprises (SOEs) for raw materials and energy. We need to properly review our experiences in this matter.
When we devolved powers last year, I worried that reviews of projects under US$5 million would get out of control, so I repeatedly called on the departments concerned to step up supervision. They could reject projects they found to be redundant or that increased pollution, but the supervision was poor. I’m asking Ye Longfei2 to take the lead in reviewing whether there have been more pros or cons since the “one-chop shop” was set up. Although there are probably more pros, we’ll have to establish a supervisory mechanism to keep watch over the cons. Policies must remain stable, and we mustn’t take back review and approval powers that have already been devolved.
From now on, we mustn’t blindly develop joint ventures. Joint ventures that are approved must meet at least two conditions: they must bring in advanced technology, and their products must be exportable. We cannot be lax about these two conditions. Generally speaking, the foreign partners in a joint venture usually don’t bring in large amounts of capital. If, after a joint venture is formed, it takes over all the [Chinese partner’s] original customers and the baseline sums it had contracted for, and if its exports use up our original quotas, what good is it? I’m asking Shen Beizhang3 to take the lead on this issue—have the Municipal Foreign Trade and Economic Relations Commission study the matter and quickly come up with several rules; clearly stipulate which types of projects are permissible and which are not, in keeping with our industrial policy. After the rules come out, we’ll organize training sessions for cadres at each level so that district and county cadres will have a firm grasp of the policy of opening up, their caliber will improve, and they can correctly control the direction of foreign investments.
During the past few years, too many hotels were built in Shanghai. There were historical reasons for the lack of macrocontrols. For quite a few joint venture hotels, the capital for construction actually came from Chinese banks and the guarantees from Chinese financial institutions. If at the time more of these investments had been used for pillar industries, industrial production in Shanghai today would not be facing as many difficulties. It is obviously a mistake to blindly develop joint ventures that squeeze out existing markets and increase pollution. Therefore all the “Jiushi projects”4 for technical upgrading must be reevaluated. Products that incur high losses—such as standard tires that need to import large quantities of raw materials and yet can’t be exported—aren’t worth placing in a joint venture to increase their production. Similar problems are evident in the textile sector. Some projects there only need to buy foreign patents or crucial equipment; they should only bring in the technology, then digest and absorb it. From 1983 to 1985, Shanghai invested several hundred million yuan a year in technical upgrading, and this played a considerable role in maintaining the momentum of our industrial growth. Now we should also conduct policy studies on establishing wholly foreign-owned enterprises and see how to develop this in a beneficial way—but beware of everyone rushing in to do it.
2. The Issue of Salaries for Chinese Managers in Joint Ventures
Why do so many people want to enter joint ventures, to the point where entire industries are eager to do so? A very important reason is that once a joint venture is formed, the wages of the Chinese managers will increase three-, five- or even tenfold, and this doesn’t even include the “red envelopes” given by the foreigners—how can this be? I’ve received many letters from the public strongly urging the government to do something about this seriously unequal distribution [of wealth]. We have a responsibility to solve this problem. I’m asking Lu Youming5 to investigate the wages of Chinese staff at joint ventures and to suggest a policy on what to do about people who accepted excessively high wages in the past and corrective measures for the future—this should be done out of a sense of responsibility to the Party.
I understand that the Huating Group of Shanghai, which is an SOE, asked the foreign party in the venture to manage its operations and formed a board of directors. As soon as someone became chairperson of this board, his salary would increase to RMB 500. When it’s so easy to get money, local finances will soon be hollowed out. If we let this go on at will, our cadres will be corrupted and our SOEs will collapse, for there’s no way they would be able to pay such high salaries and bonuses. A recent and compelling report on the 10 types of people in this city with abnormally high incomes compiled by the Municipal Office of System Reform identifies one of the 10 types as the person in authority from the Chinese side in a joint venture. In the past we advocated having existing enterprises enter into joint ventures—but it now seems that they have some problems that need to be studied in depth.
There’s no time to solve the problem of unequal distribution of wealth this year. We first have to solve the unhealthy trend of corruption and of using power for personal gain. We have to deal with unequal distribution later, but we can organize people to study this problem. Research on the high incomes of Chinese managers at joint ventures mustn’t be conducted with a lot of fanfare, nor should we examine people’s incomes individually. Rather, we should start by studying the entire wage system at joint ventures and use legal and open means to check their financial and tax accounts; then we can use these numbers along with appropriate adjustment factors to obtain a reasonably accurate picture of the situation. Next, we will make some suggestions based on the results and see how to solve the problem of unequal distribution between SOEs and joint ventures. At least we should not let the gap in staff salaries between the two get too large.
1. These are the key points made by Zhu Rongji after listening to a work report by leaders of the Minhang Economic and Technical Development Zone in Shanghai.
4. The Shanghai Jiushi Group Co. Ltd. was established in December 1987 by the Shanghai municipal government in line with the spirit of the State Council’s 1986 Document No. 94, “Directive on Increasing the Scale of Shanghai’s Use of Foreign Investment.” The company was a specialized economic entity created to reinforce urban infrastructure construction, speed up technical upgrading of industries, strengthen the city’s capacity for exporting and earning forex, and develop tertiary industries and tourism. (This policy was known as the “94 Special Project.”)
5. Lu Youming was then chairperson and general manager of the Minhang Joint Development Company of Shanghai.