Post on 13-Jan-2015
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Group 5Kushagra Sharma [057]Mohit Jain [067]Prodyot Parashar [083]Raj Kumar Singh [089]
Overview of Foreign Investment in China
• Top destination for FDI for sixteen years.
• US $52.39 B in FDI to China in the first half of 2008 –
a 45.6% increase over the same period in 2007.
• Foreign invested enterprises (“FIEs”) play a major role
in China’s economy – 58% of imports and exports.
• Top foreign investors: HK first; US sixth.
• Top FDI destination: eastern region – 81.9%.
• Hot sectors: manufacturing (57.7%) and real estate
(11.9%).
FDI Liberalization
• Before 1978, China’s economy was one of the most
autarkic in the world.
• 1950s : Only four joint ventures with the government of
the Soviet Union.
• Between mid 1950s and late 1970s : China turned
inward and pursued an economic development strategy
that prohibited any foreign investment.
• 1980 : First joint venture in China was established in
Beijing.
First phase (1979-1985)
• Inward FDI permitted
• Equity Joint Venture Law (EJV Law) by the National
People’s Congress in 1979.
• Instead of Equity Ceilings, it imposed Equity Floors.
• Only central government approved wholly owned
subsidiaries of foreign firms.
• Long approval delays; eg: 3M (1981-1984)
• 4 SEZ established in southern China in 1980, in
Shenzhen, Zhuhai, Xiamen, and Shantou.
Second phase (1986-1991)• Treatment of FIEs became further codified
• “Wholly Foreign-Owned Enterprise Law” in 1986 and the
“Sino-Foreign Cooperative Joint Venture Law” in 1988
• Legal infrastructure governing 3 main forms of FIEs-
Equity Joint Ventures, Cooperative Joint Ventures &
Wholly Foreign-Owned Subsidiaries.
• 1986 Regulations separated FIEs in 2 kinds- Qualifying
for favorable policy and regulatory treatments and
Qualifying for normal policy and regulatory treatments.
• “WFIE Law” in 1986 & Hainan Island in 1988
Investment attractiveness of a number of countries in the 1990s
Third phase (1992-1994)
• This phase removed a large number of the sectorial
restrictions on FDI.
• Business scope and geographic coverage of foreign banks was
expanded
• Joint ventures in transportation, port development, oil
exploration, and financial services were permitted.
• By 1992, China had signed bilateral investment treaties with
27 countries.
• 1992: Chinese and U.S. governments signed a MOU on a
range of issues ranging from market access to IPR protection.
Fourth phase (1995-1998)
• 2nd largest recipient of FDI in the world, following the US
• 1995: Policy measures aimed at “leveling the playing field” between
FIEs and domestic firms
• Removal of the tariff exemption on FIEs’ imports of equipment and raw
materials
• 1998: Renewed across-the-board tariff exemption treatment of FIEs
• Tariff exemption granted to FIEs in product segments promoted by
government.
• Same capital equipment and raw material tariff exemption to domestic firms
in high-tech sectors
• Unified corporate income tax rates
• 33% for all firms
Fifth phase (1998-2003)
• 1999: China and U.S. concluded negotiations over China’s
accession terms into the WTO
• 2001: WTO Ministerial Conference in Doha, Qatar formally
adopted China's terms of membership of the WTO
• Concessions made on the Chinese side:
• Eliminate all import quotas by 2006
• Reduce tariffs on industrial products from an average of 24.6% to
9.4%
• Reduce tariffs on motor vehicles from 80-100% to 25% by 2006
• Allow Foreign firms to own up to 50% of FIEs in the telecom and
insurance industries
FDI inflows to China, 1990-2005
1979-2002: A total of $446billion
Saving Rate grew from 36% to 42% with growth of FDI
Surplus
• Due to large FDI inflow China accumulated huge foreign reserve.
• US $300 Billion in 2003• 3% of GDP• Investment in US Treasury Bond• Reserve Surplus helps in controlling domestic
currency.
Foreign Holdings of U.S. long-term debt securities (as of 2006, $Millions)
Inward FDI stock as a percentage of Gross Domestic Product
Inward FDI Flows, by Economy
Millions of US dollars
-
100 000
200 000
300 000
400 000
500 000
600 000
700 000
800 000
900 000
1 000 000
2001 2002 2003 2004 2005
World
United States
Developing economies
China
Percent of China in Developing Economies
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
2001 2002 2003 2004 2005
Source- UNCTAD
Inward FDI flows as a percentage of Gross Fixed Capital Formation
Two major and unique factor helping FDI in China• Hong Kong, Macao And Taiwan account for more
than 68% of total FDI inflow in China between 1979-1996.
• Hong Kong, Macao And Taiwan are politically same country but separate economic entity.
• In 2001 three states together have a share of 42%.
FDI in China, By region
Northern : 11.02%
Coastal : 71.28%
Southeastern : 4.76%
Northeastern : 6.42%
Southern : 4.54%
Western : 1.98%
Source: World Factbook
Taiwan
Hong Kong
Macao
Prevalence of SME in FDI
To enter any market abroad need huge capital, advance technology, scale economy, organizational expertise. All these act as a entry barrier for SME to invest as FDI.
Still China have a significant SME base FDI investors mainly due to the three inter states - Hong Kong, Macao And Taiwan
Industry Distribution:• General FDI trend – congregate around few industries
with high concentration ratio.
• FDI in China was contrary to this trend, even for the Ethnically Chinese Economies(ECG) investing firms.
• FDI distribution in China was:
• More Fragmented.• Evenly distributed across various industries.• For example; the Std. Deviation of FDI across
industries was 11.3 for Taiwan; but 4.08 for China.• FDI distribution spread across traditional industries
like:• Herbal industries• Handicraft industries – Silk engraving, ivory casting etc.
Economic weight of FIE’s:• FDI from ECEs financed China’s labor intensive and
export oriented goods production.• FIE’s – responsible for tremendous Chinese
manufacturing export :• 25% from ECEs funded FIE’s• 47.1% total manufacturing export from altogether
• FIEs – strong dominant position in telecom, garments, plastics ,leather products etc.
• However; two more trends impacted by FIE’s :• Replacing of exports produced by Chinese entrepreneurs.• Substantial decline in contractual alliances with foreign alliances.• Consequently; rise in Equity Alliances.
• This trend was further reversed in the beginning of 1997.
FDI & Economic Reforms in China
• To Protect Domestic Chinese Firms after China
Joined WTO
• To Prepare Domestic Firms for FDI , Govt.
Changed Regulatory , Legal and Financial
treatment of Domestic Firms
Economic Reforms
• Grasping The Big – 120 out of 512 SOEs
• Strengthening the Asset Base and Upgrading
Technology of SOEs
• Reconstructing , Consolidating and supporting
Largest SOEs to Compete with MNCs
Corporate Restructuring• Converting SOE’s into Modern Enterprise System –
with shareholding Enterprises , Board of Directors ,
Accounting Standard , Financial Reporting
• Reorganizing SOE Asset:
Efficiency from Upstream/
Downstream Production ,
Benefit from Economies of Scale
Legacy And Criticism
• Govt. Retains Monopolies in Petroleum and Banking
• Discrimination Against Private Enterprises
• Did not allowed to enter in industries where they can threat
SOE
• Property Right protection in favor of SOE
• Lending Bias by Commercial Banks
• Foreign Exchange Allocation ( Technology ) Favored SOE
• Licensing Policy Against Private Firms
Thank you !!