Investments in China are classified into three main categories: state, private and foreign, accounting for 47, 44 and 9 percent, respectively, of total investment in the country in 2001. Last year, domestic investments increased by 16 percent, while foreign investments increased by 12.6 percent. As private investment has been growing at an average annual rate of 23 percent since 1980, it should be on par with state investment in the country.

Foreign investment in China generally does not show up in the GDP growth figures because it makes up less than 10 percent of total indigenous investment. This also explains why the slowdown in foreign investment in China during the SARS crisis will have little impact on China's GDP figures. Foreign investments' in China, however, drive the market economy, while at the same time help the country expand its overseas markets.

To foreign investors, China's main attractions are its political stability, rapid economic growth, cheap labour, huge market potential, preferential tax treatment and improving infrastructure. As such, the hardware environment is a highly competitive investment market. Though the soft environment still has many shortcomings, such as complicated approval procedures, lack of transparency in the government and insufficient protection for intellectual property, many issues have improved since China was admitted into the World Trade Organisation (WTO).

By comparison, private Chinese investors face narrowing finance channels, stricter regulations on market access and higher tax bills. For example, in the purportedly open municipal economy of Dongguan, only 41 of its 80 industries are open to indigenous private investors, compared to 62 sectors for foreign investors.

In addition, private investors have to contend with inadequate legal protection, damage and deprivation of private assets, and higher fees and penalties than foreign investors have to put up with. Despite the seemingly unlevel playing field, a number of private Mainland enterprises, such as the New Hope Group and the Hong Dou Group, have the energy and intelligence to work through these obstacles and keep their businesses growing.

Although 70 percent of foreign funds entering China are channeled into the manufacturing sector, they generally finance capital-intensive industries, especially the advanced technologies, as opposed to mainly labour-intensive industries in the past.

At the last count, foreign enterprises had set up over 400 research and development organizations. Overseas money is also increasingly being injected into commercial services. In the first half of 2003, investments in the sector grew 28 percent over the same period last year. With CEPA allowing Hong Kong service companies to enter the Mainland market from January 1, 2004, the 18 service industries that have been given easier market access into China under the agreement are expected to attract a substantial number of Hong Kong investors.

As China moves towards a market economy, its planned economy is becoming increasingly insignificant. Apart from a unified tax system for private Chinese and foreign enterprises, the government is also planning to standardize market entry policies to secure a level playing field. Once the differences in the investment environment have been leveled out, China will have completely transformed its investment environment into a market economy.