The political aspect of foreign investment is not the preoccupation of this book, but some background analysis on it will throw some light on the legal aspects of foreign investments and explain the dilemma of China's policy in regulating foreign investment. 1 In other words, it will help us to understand why China seeks to entice foreign investment with different incentives, while at the same time seeking to control foreign investment. This will also help us to understand the reasons for the instability of the policy and its inconsistent regulatory performance in practice.
As in most underdeveloped countries, in China there is a great need for capital and skill from developed countries. Attracting foreign investment is not an activity without anxiety for China, however. The lessons from China's experience with foreign countries in the nineteenth and early twentieth centuries left it deeply concerned about the potential negative impact of foreign investment. These concerns influenced policies towards foreign direct investment in different periods, thus constituting another strong force in the evolution of Chinese foreign investment polices and law.
The general economic situation in China in the late 1970s was sufficiently bad for virtually all observers, including the Chinese leadership itself, to recognize that some radical change was needed to get the economy moving again. China's industrial productivity was stagnating, its products were increasingly falling behind world standards, and the volume of its foreign trade was minimal. Estimates of per capita income suggest that after a quarter of a century of planned development China remained a poor country. By the late 1970s, the incomes of over a quarter of China's total population (some 270 million people) had fallen below a poverty line roughly comparable with that used by the World Bank to analyze poverty in developing countries. 2 The previous system simply did not work and was failing to provide the Chinese people with a satisfactory quality of life in a materialistic sense.