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China defends McDonald's eviction

BEIJING, Dec. 13 -- China Tuesday defended its eviction of a McDonald's restaturant in Beijing and denied the incident and a spate of high-profile rows with foreign businesses will adversely affect foreign investment. 'China's investment climate is still favorable and will remain attractive next year,' said Liu Zhiben, director-general of the Ministry of Foreign Trade and Economic Cooperation, adding that claims to the contrary were 'groundless and irresponsible.' Rapid economic growth, a huge domestic market and an abundant supply of cheap labor 'will make China an ideal spot for attracting foreign investment,' he said the official China Daily. But some investors have said carrot-on-a-stick statements ring hollow. 'China is far from having a legal framework that binds companies to their financial obligations,' said a Hong Kong-based economist. 'Foreign companies already know the cost and labor advantages of doing business, but they are waiting for promised new laws that protect their interests,' she said. 'China will gradually perfect its investment laws and regulations in order to create better conditions for foreign investors,' Liu said. But other investors have openly acknowledged they will remain on the sidelines until China resolves its disputes with U.S. companies such as McDonald's and Lehman Brothers, the investment firm trying to recover more than $100 million in trading losses from two government-owned Chinese firms. 'These conflicts have sent plenty of investors shivering for warmer clothes,' said a Beijing-based insurance executive. Particularly troubled by the trend are investment bankers and credit officers at securities companies.

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They are eying $600 million in Japanese, German and Italian banks loans on which Chinese government-run businesses defaulted and $40 million in unpaid debts run up on the London Metals Exchange by the Shanghai branch of state-backed China International Trust and Investment Corp. (CITIC). McDonald's set up in Beijing in the unhappy summer of 1989 after Chinese troops crushed pro-democracy demonstrators in Tiananmen Square. Its 20-year lease with the city government for property on Wangfujing street, one block from the site of the bloody massacre, set the tone for many U.S. firms momentarily disenchanted with China to resume normal business relations. The burger giant has 21 outlets in China and plans for more, but the dispute has come to epitomize an entrenched Chinese notion that terms of contracts can be altered at will. Analysts said the eviction of McDonald's 700-seat restaurant, which the city government wants to raze and replace with a new retail and commercial plaza, may be directly linked to a string of broken contracts in Shanghai. Chinese developers raising rents to cash in before property values fall are breaking contracts all over the city, with local official newspapers cheering them on, they said. They said one Shanghai newspaper recently lauded Chinese property developers for their business acumen and veracity in a series of broken rental contracts in Pudong. 'It's improper that some foreign media have used the events to undermine the credibility of Chinese authorities and discourage investor confidence,' Liu said, referring specificially to the McDonald's controversy. 'Unfortunately, those kind of comments send the wrong signal,' a Shanghai-based commercial lawyer responded. 'Major investors are hoping to hear the Chinese say they will live up to their financial and contractual obligations,' he said. 'The Chinese in general think the best defense is a good offense, but investors will not abide an institutional reluctance to take responsibility,' he added.

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