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.