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Believe it or not， even foreign investment could be bought nowadays.
When the recruitment of foreign investment has become a trend， the governmental officials at different levels are given the tasks of recruiting a certain amount of foreign capital in a certain period. In order to finish the task and thus win the favor of their superior officials， the government officials of local authorities have to make best of their “genius” and “creativity”. In some places， there are even “industrial chains” for buying foreign capital.
A city in an eastern province of China is said to play the act. In its budget， the US$1 million of foreign investment is worth RMB 170 thousand. The local government worked with the intermediate agencies to register foreign-invested companies with no real capital invested. This earned the local government good results of recruiting foreign investment， a glorious addition to governmental officials’ political performance. The intermediate agencies earned a lot from the establishment of fake foreign-invested companies. But what are really left are the confused public budget and the hole hard to be filled.
An anonymous official from the gov- ernment of this province says： “The task is too difficult and applies a lot of stress. For example， the municipal government appoints each county under its administration with the task of recruiting the foreign investment of US$100 million each year. Then the government of each county allots the task to the towns under its administration… The stress is passed down from high to low. We all know about the buying of foreign investment and have tried to stop it. But there are many reasons to stop us from giving the task of ‘recruiting foreign investment’.”
How to make it
Gong Zhen， a parliamentary member of China and Deputy Director of Jiusan Society， has made a research that revealed the stunning fact about local governments’ buying foreign investment.
According to the public data， the aforementioned unnamed city had the amount of actually-utilized foreign capital of US$547 million， 1.05 billion and 1.61 billion from 2009 to 2011， up 35.1%， 92.2% and 54.1% year on year. The annual growth rate ranked No. 1 in the whole province for three years. In 2012， the growth rate of the actually-utilized foreign capital increased by 30.9%， second in the province. Though it failed to defend the champion as the fastest grower， it still beat other cities in the total amount of foreign capital. However， Gong Zhen’s research showed that the data about this city’s foreign capital is fake and bloated. In recent years， local governments of counties， districts， towns and villages under the administration of this city all spent money “buying foreign investment”. The average deal price is RMB 170 thousand for US$1-million “foreign capital”.
Concretely， intermediate agencies that are professionally engaged in “foreign capital deal” in Guangdong are involved. They register foreign-invested companies with the identities of people from Hong Kong and Taiwan. After the foundation， the “foreign-invested companies” bought US dollars from overseas markets and then transferred the US dollar to the bank account designated by the intermediate agencies in the name of purchasing devices. In return， local government will give financial subsidies and rewards to the“foreign-invested companies” – common in China – for a certain amount of US dollars that has been invested.
However， these enterprises are nothing but empty shells. And every time the provincial or state governments make a review of its qualification and identity，they will look for enterprises with similar business scopes and borrow their identities to deal with the investigation.
The report on this city’s official website says that the counties and districts of this city all successfully finished the task of recruiting foreign investment of US$200 million in 2012. But Gong Zhen’s on-the-spot investigation has shown that a county appointed the towns and villages under its administration with the task of recruiting US$20 million averagely. However， some towns/villages did not even get one foreign-invested project last year and the entire county recruited less than US$30 million in 2012， only 15% of the goal. The unfilled amount was offset with“bought foreign capital”.
Gong Zhen says that the trend of buying foreign capital started in 2010. At that time， the increasingly hard task， which almost required 100% year-onyear increase in recruiting foreign capital， made local governmental officials insane and intrigued their “creativity”. The relatively conservative estimation says that at least US$500-million foreign capital registered in this city’s data pool was actually bought with the aforementioned method and the city spent at least RMB 85 million buying such a large amount of foreign investment.
In 2012， the international financial crisis made the situation harsher than ever before. In that year， the city lost the championship in the growth rate of recruited foreign capital， but the 30.9% increase was still amazing enough. As a retired governmental official who had been responsible for the investment recruitment for years， about half of the foreign capital invested in this city was“bought” before being “actually utilized”. This means that this city spent at least RMB 180 million buying the championship in the total sum of foreign capital. The money used to buy “foreign investment” for the sake of political performance should be of course afforded by the government. However， in order to remain their malpractices undercover， the local government of this city initially moves the fund for buying foreign capital to the state-owned companies controlled by governments of counties and districts. Then those SOEs pay the intermediate agencies in a secret manner. The financial power of counties and districts could barely suffice these “agent commissions”while some towns or villages with poor financial conditions have to borrow money from other counties to buy the foreign capital.
The spending on “burying of foreign capital” is a great burden for the local governments of towns and villages. Last year， all the towns and villages in this city received the task of recruiting foreign investment of US$10-20 million. This year， they are required to make at least 5% growth. Some remote towns and villages of this city only possess the disposable fund of less than RMB 3 million in a year， far away from sufficing the spending on “acquisition of foreign investment”.
The aforementioned official of the provincial government confirms the increasing goal about recruiting foreign investment even though they know well about the matter of “buying foreign capital”.
Booming deals
An anonymous insider businessman from Hong Kong also revealed some inside information about the process of“buying foreign capital”. This businessman came from mainland China and has been serving in the foreign trade business for more than 20 years. He once made intensive investment in a dozen of industries and knew well about the details.
According to him， local governments， pressed by the grand goal of recruiting foreign investment， use every means to finish the task. Therefore， the corresponding “market services” were born. Some agencies are professionals to register foreign companies in exchange for the payment from local governments. These years， the comprehensive cost of local governments’ buying foreign capital kept increasing from RMB 40-60 thousand for the registered capital of US$1 million to the RMB 300-400 thousand for the registered capital of US$1 million.
He says that many cities are doing this， covering the developed Yangtze Delta Area and the comparatively less developed Central and Western Areas of China. There are many kinds of companies playing the role of “intermediate agencies” – even small credit firms and guarantee companies are involved in this. They usually make use of their free capital to finish the fake registration and investment. A member of a city’s council once presented a proposal to the city’s government to reflect about this phenomenon. He pointed out that the review of local governmental officials’ performance in recruiting foreign capital forced local governments to relate the land transfer with the “foreign capital”.
According to the proposal， the transfer of the land for the industrial use requires the foreign capital of US$100-200 thousand. Therefore， a domestic company needs to possess an overseas identity if it wants to buy a tract of land in this city. It also needs to turn RMB into foreign currencies and transfer the money into its domestic bank account –from another domestic account actually– through underground banks. Thus the capital becomes foreign capital， but it costs a lot of time and energy， as well as the assets.
The proposal says that more than half of the foreign capital in that city is given the false identity in this way and it is believed that the other places of China share the similar situation.
In addition， the proposal also says that local governments usually give those so-called foreign-invested enterprises the subsidies of RMB 40-60 thousand. But this is far from saving them from their suffering： the money transfer through underground banks is accompanied with loss and risks； registering an overseas company means expense and trouble； founding a joint venture foretells hurdles when growing strong enough to go public； and leaving the foreign investor brings about more trouble.
At last， the proposal suggests the cancellation of the review of governmental officials in recruiting foreign capital.
It has been recognized that governments of some provinces have already taken stricter regulatory and supervisory rules for the counting of foreign capital. For example， the Jiangsu Provincial Department of Commerce just issued the Guideline of Counting the Actually-Utilized Foreign Capital （hereafter Guideline for short）.
The new Guideline required the commercial governmental departments at different levels in Jiangsu should be responsible for the authenticity of the projects and the amount of investment. The provincial commercial department established a special team to check the accuracy and authenticity of the data through both the computer and manpower. It also requires the commercial departments at different levels to provide different supporting documents， such as the tax payment， the withholding of social funds and so on.
However， how this new Guideline will work remains to be seen. As the aforementioned businessman from Hong Kong says， “local governments will always find ways to bypass those regulatory rules”. The key of the solution is not about the stricter supervision； instead， it rests with the performance review system. The competitive stress has forced local governments to use every means to keep the data about foreign investment from falling. That also explains why such a problem is not reports despite being known to everyone.
When the recruitment of foreign investment has become a trend， the governmental officials at different levels are given the tasks of recruiting a certain amount of foreign capital in a certain period. In order to finish the task and thus win the favor of their superior officials， the government officials of local authorities have to make best of their “genius” and “creativity”. In some places， there are even “industrial chains” for buying foreign capital.
A city in an eastern province of China is said to play the act. In its budget， the US$1 million of foreign investment is worth RMB 170 thousand. The local government worked with the intermediate agencies to register foreign-invested companies with no real capital invested. This earned the local government good results of recruiting foreign investment， a glorious addition to governmental officials’ political performance. The intermediate agencies earned a lot from the establishment of fake foreign-invested companies. But what are really left are the confused public budget and the hole hard to be filled.
An anonymous official from the gov- ernment of this province says： “The task is too difficult and applies a lot of stress. For example， the municipal government appoints each county under its administration with the task of recruiting the foreign investment of US$100 million each year. Then the government of each county allots the task to the towns under its administration… The stress is passed down from high to low. We all know about the buying of foreign investment and have tried to stop it. But there are many reasons to stop us from giving the task of ‘recruiting foreign investment’.”
How to make it
Gong Zhen， a parliamentary member of China and Deputy Director of Jiusan Society， has made a research that revealed the stunning fact about local governments’ buying foreign investment.
According to the public data， the aforementioned unnamed city had the amount of actually-utilized foreign capital of US$547 million， 1.05 billion and 1.61 billion from 2009 to 2011， up 35.1%， 92.2% and 54.1% year on year. The annual growth rate ranked No. 1 in the whole province for three years. In 2012， the growth rate of the actually-utilized foreign capital increased by 30.9%， second in the province. Though it failed to defend the champion as the fastest grower， it still beat other cities in the total amount of foreign capital. However， Gong Zhen’s research showed that the data about this city’s foreign capital is fake and bloated. In recent years， local governments of counties， districts， towns and villages under the administration of this city all spent money “buying foreign investment”. The average deal price is RMB 170 thousand for US$1-million “foreign capital”.
Concretely， intermediate agencies that are professionally engaged in “foreign capital deal” in Guangdong are involved. They register foreign-invested companies with the identities of people from Hong Kong and Taiwan. After the foundation， the “foreign-invested companies” bought US dollars from overseas markets and then transferred the US dollar to the bank account designated by the intermediate agencies in the name of purchasing devices. In return， local government will give financial subsidies and rewards to the“foreign-invested companies” – common in China – for a certain amount of US dollars that has been invested.
However， these enterprises are nothing but empty shells. And every time the provincial or state governments make a review of its qualification and identity，they will look for enterprises with similar business scopes and borrow their identities to deal with the investigation.
The report on this city’s official website says that the counties and districts of this city all successfully finished the task of recruiting foreign investment of US$200 million in 2012. But Gong Zhen’s on-the-spot investigation has shown that a county appointed the towns and villages under its administration with the task of recruiting US$20 million averagely. However， some towns/villages did not even get one foreign-invested project last year and the entire county recruited less than US$30 million in 2012， only 15% of the goal. The unfilled amount was offset with“bought foreign capital”.
Gong Zhen says that the trend of buying foreign capital started in 2010. At that time， the increasingly hard task， which almost required 100% year-onyear increase in recruiting foreign capital， made local governmental officials insane and intrigued their “creativity”. The relatively conservative estimation says that at least US$500-million foreign capital registered in this city’s data pool was actually bought with the aforementioned method and the city spent at least RMB 85 million buying such a large amount of foreign investment.
In 2012， the international financial crisis made the situation harsher than ever before. In that year， the city lost the championship in the growth rate of recruited foreign capital， but the 30.9% increase was still amazing enough. As a retired governmental official who had been responsible for the investment recruitment for years， about half of the foreign capital invested in this city was“bought” before being “actually utilized”. This means that this city spent at least RMB 180 million buying the championship in the total sum of foreign capital. The money used to buy “foreign investment” for the sake of political performance should be of course afforded by the government. However， in order to remain their malpractices undercover， the local government of this city initially moves the fund for buying foreign capital to the state-owned companies controlled by governments of counties and districts. Then those SOEs pay the intermediate agencies in a secret manner. The financial power of counties and districts could barely suffice these “agent commissions”while some towns or villages with poor financial conditions have to borrow money from other counties to buy the foreign capital.
The spending on “burying of foreign capital” is a great burden for the local governments of towns and villages. Last year， all the towns and villages in this city received the task of recruiting foreign investment of US$10-20 million. This year， they are required to make at least 5% growth. Some remote towns and villages of this city only possess the disposable fund of less than RMB 3 million in a year， far away from sufficing the spending on “acquisition of foreign investment”.
The aforementioned official of the provincial government confirms the increasing goal about recruiting foreign investment even though they know well about the matter of “buying foreign capital”.
Booming deals
An anonymous insider businessman from Hong Kong also revealed some inside information about the process of“buying foreign capital”. This businessman came from mainland China and has been serving in the foreign trade business for more than 20 years. He once made intensive investment in a dozen of industries and knew well about the details.
According to him， local governments， pressed by the grand goal of recruiting foreign investment， use every means to finish the task. Therefore， the corresponding “market services” were born. Some agencies are professionals to register foreign companies in exchange for the payment from local governments. These years， the comprehensive cost of local governments’ buying foreign capital kept increasing from RMB 40-60 thousand for the registered capital of US$1 million to the RMB 300-400 thousand for the registered capital of US$1 million.
He says that many cities are doing this， covering the developed Yangtze Delta Area and the comparatively less developed Central and Western Areas of China. There are many kinds of companies playing the role of “intermediate agencies” – even small credit firms and guarantee companies are involved in this. They usually make use of their free capital to finish the fake registration and investment. A member of a city’s council once presented a proposal to the city’s government to reflect about this phenomenon. He pointed out that the review of local governmental officials’ performance in recruiting foreign capital forced local governments to relate the land transfer with the “foreign capital”.
According to the proposal， the transfer of the land for the industrial use requires the foreign capital of US$100-200 thousand. Therefore， a domestic company needs to possess an overseas identity if it wants to buy a tract of land in this city. It also needs to turn RMB into foreign currencies and transfer the money into its domestic bank account –from another domestic account actually– through underground banks. Thus the capital becomes foreign capital， but it costs a lot of time and energy， as well as the assets.
The proposal says that more than half of the foreign capital in that city is given the false identity in this way and it is believed that the other places of China share the similar situation.
In addition， the proposal also says that local governments usually give those so-called foreign-invested enterprises the subsidies of RMB 40-60 thousand. But this is far from saving them from their suffering： the money transfer through underground banks is accompanied with loss and risks； registering an overseas company means expense and trouble； founding a joint venture foretells hurdles when growing strong enough to go public； and leaving the foreign investor brings about more trouble.
At last， the proposal suggests the cancellation of the review of governmental officials in recruiting foreign capital.
It has been recognized that governments of some provinces have already taken stricter regulatory and supervisory rules for the counting of foreign capital. For example， the Jiangsu Provincial Department of Commerce just issued the Guideline of Counting the Actually-Utilized Foreign Capital （hereafter Guideline for short）.
The new Guideline required the commercial governmental departments at different levels in Jiangsu should be responsible for the authenticity of the projects and the amount of investment. The provincial commercial department established a special team to check the accuracy and authenticity of the data through both the computer and manpower. It also requires the commercial departments at different levels to provide different supporting documents， such as the tax payment， the withholding of social funds and so on.
However， how this new Guideline will work remains to be seen. As the aforementioned businessman from Hong Kong says， “local governments will always find ways to bypass those regulatory rules”. The key of the solution is not about the stricter supervision； instead， it rests with the performance review system. The competitive stress has forced local governments to use every means to keep the data about foreign investment from falling. That also explains why such a problem is not reports despite being known to everyone.