1
Trends in China’s Inward Foreign Direct Investment
ASIA @ RMIT
April 2009
Presenter: Dr John GioneaRMIT-TAFE Business School
2
TOPIC PLAN
• China’s Open doors policy• Growth of Foreign direct investment flows and the
slow down in China’s share of global FDI inflows• Signs of growing nationalism in China• Geographic trends• Sectoral trends• Australian FDI in China• A new development strategy in China?
2
3
China’s Open Door Policy
• Deng Xiaoping committed China to adopting policies which promote foreign trade and economic investment.
• Special Economic Zones (SEZs): – Shenzhen, Zhuhai, Shantou and Xiamen; – Later on: Hainan Island
• Many coastal cities designated as opened areas:– Shanghai, Tianjin, Guangzhou and Nanjing.
• No Open Door Policy, no Modern China
4
Strong growth of China’s Inward FDI Flows(US$ million)
- 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000 90 0001
97
8
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
US
$ M
illio
ns
Source: adapted from UNCTAD,WIR,2008
5
China annual FDI Inflows(US$ b.) and % share of global FDI inflows, 1990-2007
0
10
20
30
40
50
60
70
80
90
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
US
$ b
illi
on
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
% g
lob
al s
har
e
China inflows
China % share
Source: adapted from UNCTAD,WIR,2008
Why the % share decline?
6
Indices of annual growth of World FDI inflows and China FDI inflows(1990=100)
0
50
100
150
200
250
300
Inde
x(19
90=1
00)
World inflows(% p.a.) China inflows(% p.a)
Source: adapted from UNCTAD,WIR,2008
7
Trend growth rates(% p.a.) for China and other country/groups, 1994-2007
5.56.7
8.99.0
12.314.614.7
16.922.624.3
28.9
SE Asia
China
C& S America
North America
World average
European Union
Hong Kong
Africa
India
CIS
Middle East
% p.a.
China had a below world average growth of FDI inflows
Source: adapted from UNCTAD,WIR,2008
8
Share of China’s FDI inflows and Inward FDI stock in China’s Gross Fixed Capital Formation(GFCF)
and GDP, %, 1990-2007
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
% G
FC
F
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
% G
DP
FDI inflows/GFCF
Inward FDI Stock /GDP
Source: adapted from UNCTAD,WIR,2008
The importance of Inward FDI For China’s economy has relatively declined
9
Comparative Inward FDI Stock as a % of GDP,selected economies,1990,2007
0
10
20
30
40
50
60
1990 23.2 6.8 10.6 6.8 5.1 18.1
2007 34.4 15.1 40.9 47.1 10.1 55.6
Australia US EU Denmark ChinaNew
Zealand
Source: adapted from UNCTAD,WIR,2008
10
US dollar/1 Yuan (average annual rates)
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
US
$/1
Yu
an
The issue of China’s hard currency reserves(US$ 2000 billion!!!)
Source: adapted from USDA data
11
Utilized FDI value(US$ Billion) and Number of FDI Projects, 1999-2008
Source: adapted from PRC Ministry of Commerce(MOFCOM)
0
10
20
30
40
50
60
70
80
90
100
1999 200020012002 20032004 200520062007 2008
US
$Bil
lio
n
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
Nu
mb
er o
f P
roje
cts
Utilized FDI(US$ B)
No. of Projects
12
Top 10 FDI Investors in China 1979-88,% share, (Total US$ 28.4 B.)
0.5
0.6
0.6
0.6
0.7
1.1
1.9
4.7
8.5
70.8
France
Canada
United Kingdom
The Netherlands
Spain
West Germany
Singapore
Japan
United States
H.Kong/Macao
%
Source: adapted from US China Business Council/PRC Ministry of Commerce(MOFCOM)l
13
Top 10 FDI Investors in China in 2008,% share, (Total US$92.4)
1.6
2.1
2.8
3.1
3.4
3.5
4.0
4.8
17.3
44.4
Mauritius
Taiwan
Western Samoa
United States
South Korea
Cayman Islands
Japan
Singapore
British Virgin Islands
Hong Kong
%
Source: adapted from US China Business Council/PRC Ministry of Commerce(MOFCOM
14
Top 10 Foreign Investors in China, % share, 1979-88 and 2008
0.5
0.6
0.6
0.6
0.7
1.1
1.9
4.7
8.5
70.8
France
Canada
United Kingdom
The Netherlands
Spain
West Germany
Singapore
Japan
United States
H.Kong/Macao
%
2008: US$ 92.4 B
%
1.6
2.1
2.8
3.1
3.4
3.5
4.0
4.8
17.3
44.4
Mauritius
Taiwan
Western Samoa
United States
South Korea
Cayman Islands
Japan
Singapore
British Virgin Islands
Hong Kong
%
1979-88:US$ 28.4B.
Source: adapted from US China Business Council/PRC Ministry of Commerce(MOFCOM
15
China’s FDI inflows by type of vehicle,%, 2006,2008
0
10
20
30
40
50
60
70
80
% of Total
2006 23 3 74 1
2008 19 2 78 1
EJVs CJVs WFOEs FISVs
EJVs = equity joint ventures; CJVs = cooperative joint ventures; WFOEs = wholly foreign-owned enterprises; FISV=Foreign invested shareholding ventures. See Glossary at the end of this file.
16
Sectoral distribution of China’s FDI Inflows,%,2007
Manufacturing53%
Real Estate11%
Leasing&Business services
6%
Transport, storage&post
6%
Wholesale&Retail2%
Other22%
See comparative shares forDeveloping countries and the Worldon the next slide
Source: adapted from US-China Business Council, February 2008
17
Sectoral distribution of FDI inflows(%) for developing countries and the world,
1989/91 and 2004/06
0
10
20
30
40
50
60
% of total
Primary 11.2 9.6 6.9 13.2
Manufacturing 46.5 34 34.2 22.9
Services 30.7 52.8 50.4 55.8
1989/91 2004/06 1989/91 2004/06
Developing World
18
Growing signs of economic nationalism• The unified company tax(25%)• USBC: A more restrictive view of FDI inflows
– Emphasis on ‘quality’ foreign investment– Best use of of foreign investment to boost domestic
innovation– Antimonopoly Law:some mergers and acquisitions could
be reviewed and halted in the name of national security• Ex-EU Trade commissioner, P. Mandelson noted:
– an “unpredictable” policy for mergers and acquisitions and – barriers to market entry, including capital requirements,
licensing and forced joint ventures. – “China appears to have put out the mat for foreign
investment, but the door is still half closed.In some cases it appears to be swinging shut.”
19
Annual Australian Outward FDI stock (A$M)in China, and China’s % share of Australian total, 1994-2007
0
200
400
600
800
1000
1200
1400
1600
1800
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
A$
Mil
lio
n
0
0.1
0.2
0.3
0.4
0.5
0.6
% s
har
e
A$M
%
Source: adapted from ABS 53520 - International Investment Position, Australia: Supplementary Statistics, 2007
20
The trade-investment discrepancy
• Ma, Yang and Zhang(2008:70-86), found that, while China was Australia's third largest trading partner in 2005, it was only the twenty-first biggest investment destination.
• Similarly, Australia was China's ninth largest trading partner and yet the seventeenth largest investor.
• Why the discrepancy?
21
China and the Financial crisis: Quarterly Real GDP Growth,2008
(year/year % change)
0
2
4
6
8
10
12
% y/y
% y/y change 10.6 10.1 9 6.8
Q1 08 Q2 08 Q3 08 Q4 08
Source: adapted from FT China Confidential of 19/03/09
22
China’s Premier at the March 2009 Parliament meeting; Crisis measures
• China will have in 2009 an annual growth target of 8% with a CPI inflation rate forecast at 4% for the full year– Monetary and fiscal stimulus to spur growth– Increase in social security spending by 17.6% from last year– Tax incentives and fiscal measures to support the export sector,
while keeping the exchange rate “basically stable”– Fresh policies to spur auto consumption– Increased spending for the rural economy and agricultural sector.– Will spend RMB 43 bn on constructing low-rent housing in 2009
and expand access to credit for the buyers of small and medium-sized apartments
• Shift in development strategy?– From export-based growth to domestic economy-based growth
Source:adapted from Financial Times, China Confidential 19/03/09
23
References
• The US-China Business Council, 2008 and 2009http://www.uschina.org/statistics/fdi_cumulative.html
• Ma Z, Yang R, and Zhang Y., 2008, ‘Australia's direct investment in China: trends and determinants’ in Economic Papers, Economic Society of Australia, 01 March, 2008
http://www.accessmylibrary.com/coms2/summary_0286-34119079_ITM
( viewed at 10 February, 2009)• UNCTAD, World Investment Report 2008
– www.unctad.org/wir
24
Foreign Direct Investment
FDI glossary
25
Foreign direct investment (FDI)
• An investment involving management control of a resident entity in one economy (the host country), by an enterprise in another economy (the home country).
• FDI involves a long-term relationship reflecting an investor’s lasting interest in a foreign entity. The investor (the parent firm) and the foreign entity/asset (the ‘affiliate’— ‘subsidiary’.
26
FDI Concepts
• Flow: amount of FDI over a period of time (one year)
• Stock: total accumulated value of foreign owned assets at a given point in time.
.
27
Other FDI concepts
• FDI flows (outflows, inflows)• FDI stock (outward, inward)• ‘Greenfield’ investment = new investment made up
by setting up a new affiliate overseas• Cross border M & As (mergers and acquisitions) =
acquisition of more than 10% equity share of an existing operation overseas– mergers = the combining of two or more firms– acquisition = take-over of an existing operation
28
Equity joint ventures(EJVs)
• EJVs are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. Joint ventures are usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner.
29
Cooperative Joint Venture(CJV)
• In a CJV, the parties involved may operate as separate legal entities and bear liabilities independently rather than as a single entity.
• A party (typically, but not always, the Chinese party) may contribute non-cash intangibles in the form of “cooperative conditions”. Such “cooperative conditions” may consist of market access rights, rights to use buildings or office space owned or leased by the party that are not subject to clear valuation. In exchange for such “cooperative conditions”, the party is entitled to participate in the distributable earnings of the CJV.