Business: Fools rush in; Doing business in China; The Economist. London: Aug 7, 2004.Vol.372, Iss. 8387; pg. 56 (Copyright 2004 The Economist Newspaper Ltd. All rights reserved.) China's chaotic business climate continues to claim foreign victims EVEN with its economy slowing, China remains the corporate world's favourite d estination. Actual foreign direct investment (FDI) rose to $34 billion in the first half of 2004, and is on course to exceed $60 billion for the year--a new record. Contracted FDI, deals that are signed but not yet completed, jumped e ven higher, to $73 billion, in the same period. Foreign multinationals are loth to admit it, but doing business in China is fa r from easy--and often not very lucrative. Take another look at the FDI figure s: in the late 1990s, actual and contracted FDI numbers matched as firms inves ted as fast as they could sign deals. While the absolute sums have grown since , a gap has emerged and widened (see chart). This is explained, at least in pa rt, by the fact that not all the dream deals that are signed materialise. Inde ed, there is evidence of an increasing number turning sour. That was certainly true for Shell, ExxonMobil and Gazprom, three oil and gas g iants. They thought they had agreed to build an $18 billion gas pipeline acros s the mainland jointly with PetroChina, China's biggest oil firm. On August 3r d, the deal fell apart. Bankers close to the talks said that PetroChina tried to cut the project's percentage return on investment to low single figures bec ause it would not be able to sell the piped gas for as much as it had hoped. W ith the atmosphere already damaged--PetroChina's ex-chairman Ma Fucai was alwa ys against foreign involvement--this was the last straw. The foreign firms had not invested much cash. But after three years of fraught negotiations, they n ow walk away with nothing, leaving behind their designs, field-development pla ns and technology. The goal posts suddenly shifted too for Thames Water, a British firm which is now part of German utility RWE. In June, Thames pulled out of a $73m advanced waste-water treatment plant it had built and was running in Shanghai, after Be ijing ruled that the fixed annual 15% return Thames had negotiated with the ci ty was now illegal. British American Tobacco, which announced last month that it had won central g overnment permission to build a $1.5 billion cigarette factory--the first such foreign-controlled plant--found its apparent coup roundly contradicted by oth er branches of the state, including the national tobacco monopoly and China's main economic policymaking body. The British group has been negotiating this i nvestment since 2000--and it is still not clear when, or if, it will get the g reen light. SABMiller, a South African brewer, meanwhile, was not even given a chance to negotiate. Earlier this year, the management of Harbin Brewery, in which it owned a stake, and Harbin's local city government, also a shareholder , contrived to sell the beer-maker to America's Anheuser-Busch through a murky investment vehicle. There are, of course, overseas firms making good money in China. But navigatin g the country's opaque bureaucracy and maze of ever-changing rules, finding tr ustworthy local partners, understanding that Chinese officials at the highest level believe that foreign firms deserve little in return for their investment s, and battling piracy and outright fraud, continue to take up more time, ener gy and money than in any other major market. The fact that more and more plann ed investments never materialise may be a sign that the foreigners are at last getting wise to this. --

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