country's western region, as well as for small enterprises with smaller profits, Wen said. A five-year grace period is given to foreign-funded enterprises that already have signed contracts, so that the change will not affect their operations in China, he said.

China has a set of full-fledged laws and regulations for foreign-funded enterprises and a fair and stable market environment, Wen said. He called these "the biggest favorable factor" in attracting and promoting foreign investment in the country.

At the same time, the premier stressed that while China protects the lawful rights and interests of foreign businesses here, those companies should protect the lawful rights and interests of the Chinese workers they employ.

Credibility crisis

Both China and South Korea should reflect on the illegal withdrawals by South Korean-invested companies, said Piao Jianyi, an expert on South Korean studies at the Institute of Asia-Pacific Studies of the Chinese Academy of Social Sciences.

The South Korean Government has failed to promote the transition of small and medium-sized enterprises in South Korea, while the South Korean industrial structure advances along with its economic development. Instead of adopting policies to help these enterprises adjust their industrial structure, it has left them in the hands of market forces, Piao said.

Piao pointed out that 95 percent of the South Korea-invested firms in China are technologically unsophisticated, labor-intensive, highly polluting and energy-consuming small and medium-sized enterprises-sunset businesses that cannot survive in South Korea. Many of them locate their production bases in China to take advantage of cheap labor resources and various preferential policies for foreign-funded enterprises, then sell their products in South Korea. Given the large potential profit margins, they have been reluctant to improve their management and enhance their competitiveness.

South Korean-invested companies are not as good at localizing in China as those funded by European and U.S. investment, Piao said. Their poor adaptability in China has been exemplified by their inefficient management and clumsy responses to changes in the external business climate, he said.

Piao also called on China to learn a lesson from the exodus of South Korean entrepreneurs, saying that China's institutional development has lagged behind its economic development. China has been doing a good job in attracting foreign investment with favorable policies, a well-developed legal system and convenient procedures. But when it comes to handling the withdrawals of foreign-funded companies, its efforts have been found lacking, he said. Foreign-funded companies have to undergo complicated procedures before they can legally end their operations in China. That's partly why South Korean companies prefer to simply flee rather than take the time to go through the legal procedures. Also, some local governments have set up obstacles to prevent foreign-funded companies from illegally leaving the country in light of employment and taxation considerations, he said.

Illegal withdrawals by South Korean companies are unacceptable by any means, Piao said. They not only have damaged the image of South Korean companies in China, but also may have negative consequences for the development of economic relations between the two countries, he said.

Zhang of the Party School of the CPC Central Committee said the withdrawals would not affect China's efforts to attract foreign investment. "Large foreign-funded companies are operating stably in China," he said.

"South Korea should be more concerned about the withdrawals than China is, because what is at stake here is the reputation of South Korean companies."

According to Kim, the South Korean Government will take a series measures to address the problem. First, it will inform companies planning to invest in China that the labor costs are no longer as cheap as before. Second, it will ask them to prepare for a "harmonious" retreat if they later decide they do not want to continue running businesses in China. Third, it will advise the South Korean-invested companies to focus on China's domestic market, because companies that make products in China and export them to the United States, Japan and Europe at a price advantage are most susceptible to the recent changes in China's business environment.

Despite these concerns, Kim said ailing companies only represent a small fraction of South Korean-funded firms in China.

"The mainstream is that more than 95 percent of the Korean firms invested in China are now in good condition," Kim said. "Our trade with China last year totaled around $150 billion and is projected to reach $200 billion in the next five years."