Perhaps reflecting the caution that has gripped the investment community, the average contract size in 1997 fell to $2.5 million, an almost 18 percent decrease over 1996. Wholly foreign-owned enterprises (WFOEs) had an average contract size of $1.8 million (a 38 percent drop), and equity joint ventures (EJVs) averaged a contract size of $2.4 million (down 6 percent). Foreign investors increasingly choose to go it alone: 46 percent of all signed contracts in 1997 took the form of WFOEs, compared to 43 percent for EJVs and 11 percent for contractual joint ventures.

All indicators of US direct investment in China fell in 1997. Contracted investment dropped 29 percent to $4.9 billion, its lowest level in five years, and utilized investment was down 6 percent to $3.2 billion. The number of contracts signed fell 13 percent over the 1996 level to 2,188. And the average contract size, at $2.3 million, was well below the international average and 18 percent smaller than the average US contract size in 1996.

According to contracted FDI figures, Hong Kong, as in recent years, was the PRC's largest investor in 1997, with the United States and Japan a distant second and third, respectively. Hong Kong also remains the top source of China's utilized FDI, with Japan, Taiwan, and the United States rounding out the second, third, and fourth positions, respectively.

The decreasing rates of investment have appeared to catch Beijing's attention. The government reinstated the capital equipment import duty exemptions that it had revoked beginning in 1996, though the exemptions do not apply to all projects (see February CMI, p.4). Beijing also reportedly is considering allowing foreign investment in small- and medium-sized State-owned enterprises (SOEs) as a potentially effective means of shedding some of the burden of the SOE albatross. Ongoing negotiations for China's accession to the World Trade Organization (WTO), meanwhile, also may sway policymakers toward improving the investment environment in such key areas such as market access and policy transparency.

FDI rises in first quarter of 1998, but slowdowns predicted

China registered stronger-than-expected foreign direct investment (FDI) inflows in the first quarter of 1998. Contracted investment jumped 10.1 percent, and utilized investment rose 9.7 percent, compared to figures for the first quarter of 1997. But Ministry of Foreign Trade and Economic Cooperation (MOFTEC) economists expect these numbers to drop and caution that the figures may be misleading, in part because the sharp fall in contracted investment in 1997 created a low base of comparison. Several uncharacteristically large deals with Western companies, including a multi-year $1 billion deal with Eastman Kodak Co. and a $4.2 billion deal with the Royal Dutch/Shell Group, also may have skewed the figures.

The origin of new investment entering China is changing, with contracted investment from Asian economies down to roughly 55 percent of the PRC's first-quarter total, compared with 62 percent for the same period last year (see Table 2, p.2). Utilized investment from Asia rose about 2 percent, due primarily to a 51 percent increase in investment from Singapore and a 13 percent increase in investment from Hong Kong. Contracted investment from the United States and the European Union (EU) was down 4.3 percent and 8.3 percent, respectively. Utilized investment, however, jumped sharply, with US investment up 28.4 percent and EU investment up 75.4 percent. The most dramatic increase (114 percent) came from the tax-haven Virgin Islands, which was the source of contracts worth over $1.6 billion, second only to Hong Kong. Utilized investment from the islands also increased more than 100 percent to $411 million.

Table 1: FDI in China 1979-1997

Total Foreign Direct Investment No. of Contracts	1979-89 21,776	1990 7,273	1991 12,978	1992 48,764	1993 83,437	1994 47,549	1995 37,011	1996 24,556	1997 21,046	% Change -14%	Total 304,390
Amt. Contracted (US$ mn)	32,360	6,596	11,980	58,122	111,436	82,680	91,282	73,276	51,780	-29%	519,512
Amt. Utilized (US$ mn)*	18,468	3,410	4,366	11,008	27,515	33,767	37,521	41,726	45,280	9%	223,061
US Direct Investment No. of Contracts	959	357	694	3,265	6,750	4,223	3,474	2,517	2,188	-13%	24,427
Amt. Contracted (US$ mn)	3,948	358	548	3,121	6,813	6,010	7,471	6,920	4,940	-29%	40,129
Amt. Utilized (US$ mn)*	1,729	456	323	511	2,063	2,491	3,083	3,440	3,240	-6%	17,336
US Share of Contracted Investment		12.2%	5.4%	4.6%	5.4%	6.1%	7.3%	8.2%	9.4%	9.5%	--

SOURCES: Ministry of Foreign Trade & Economic Cooperation (MOFTEC), Zhongguo Duiwai Jingji Maoyi Nianjian, 1995/96 and 1996/97; State Statistical Bureau (SSB) for 1997 data.

Table 2: FDI in China by Country, First Quarter, 1998

	Number of Contracts			Contracted FDI ($ million)			Utilized FDI ($ million)
Country	1998 (Q1)	1997 (Q1)	% Change	1998 (Q1)	1997 (Q1)	% Change	1998 (Q1)	1997 (Q1)	% Change
World	3,971	4,181	-5.0	8,720.0	7,921.0	10.1%	8,596.0	7,837.0	9.7%
Hong Kong	1,659	1,720	-3.6%	2,954.0	3,071.3	-3.8%	4,088.1	3,593.4	13.8%
Taiwan	540	594	-9.1%	466.0	602.2	-22.6%	686.6	641.7	7.0%
Japan	229	323	-29.1%	599.9	602.4	-0.4%	505.0	783.4	-35.5%
Singapore	121	156	-22.4%	570.0	483.6	17.8%	360.1	237.8	51.4%
South Korea	220	344	-36.0%	163.3	262.3	-37.8%	199.5	451.5	-55.8%
EU (total)	193	183	5.5%	783.6	854.6	-8.3%	963.4	549.2	75.4%
Germany	50	30	66.7%	272.8	115.2	136.7%	149.7	209.3	-49.3%
Grt. Britain	38	75	-49.3%	128.1	372.0	-65.6%	259.7	173.4	49.8%
United States	444	426	4.2%	643.0	674.4	-4.6%	776.5	604.8	28.4%
Virgin Isl.	105	56	87.5%	1,622.0	757.2	114.2%	411.5	177.5	131.7%

Source: MOFTEC