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Chinese Machinery Sector

Until 1978, the machinery industry in China was dominated by large state-owned enterprises (SOEs), built between 1950 and 1980. During the 1980s and particularly with privatisation attempts increasing in 1999, the structure of China’s secondary industry modified basically. Private Chinese entrepreneurs and foreign investors increasingly lent to the exceptional growth in the manufacturing output. The machinery industry is extremely dependent on the investment actions of their industrial customers and is therefore very sensitive to developments in the economy as a whole. In the last 10 years, China became a force to watch, mainly due to heavy investments to widen its industrial base. Therefore, it is not surprising that in the course of China’s investment into further production facilities, machinery expenditure raised 32% per year from 2001 to 2006. In 2005, machinery worth USD 267 billion was consumed in China, 31% more than the year before. In 2004 and 2005, 22 % of the machines produced in China were exported. Foreign imported machinery always had a extraordinary market share in China, but a change of the pattern happened in past years. While domestically sourced machinery in 2001 had about 40% market share in China, in 2004 this share had declined to 32%. Here one of the trends in the machinery market becomes seeable: Import substitution. Interestingly, foreign manufacturers support this trend by continuously supplying Foreign steer Investment (FDI) to establish their own manufacturing presence in China. They are likely one of the greatest adding factors in substituting imported machinery, reach to higher value-added technologies. As mentioned earlier, the inflow of FDI into China has remained strong since the mid 1990s, as foreign manufacturers saw the advantages of low production costs and China’s big home market. In 2005, China’s inflow of FDI amounted to USD 60.3 billion, staying approximately at the same level as in 2004. A majority (70%) of the FDI went into the

manufacturing sector. Within the manufacturing sector, the machinery and equipment market drew USD 4 billion of FDI in 2005. In terms of countries of origin, roughly 7% of the total FDI in 2004 originated from the European Union. However, funds invested in China via offshore vehicles in locations such as the Cayman or Virgin Islands or even Hong Kong cannot be tracked back to the original investing country, hence the real investment by the EU-25 is likely to be higher.