Foreign Direct Investment (FDI) Inflows and Outflows in Today’s China

China now reigns as the world’s largest destination for FDI, overtaking the United States for the first time in history. The nation is not only a magnet for FDI but also an important source of this type of investment. Until recently, SOEs were China’s main outward investors. In fact, the first generation of Chinese multinational companies were mainly large SOEs, operating in what used to be tightly regulated, monopolized industries such as international trading, natural resources, financial services, and shipping. The second generation of large Chinese international enterprises emerged in the early to mid-1990s in very competitive manufacturing industries, especially the electronics, information, and communication technologies. Such examples include Lenovo (personal computer); Haier, TCL (consumer electronics); and Huawei Technologies and ZTE (global telecom equipment). At their inception, these firms had diverse ownership structures, including local government ownership, private ownership, or foreign participation.

Investment inflows have sped the country’s move toward market capitalism, shifting the composition of the national economy away from SOEs and toward private businesses, thus welcoming the influx of foreign participation through various structures with the most popular being WFOEs and JVs. Although outward investment remains rather small in absolute terms, especially compared to the inward flow, Chinese global companies have been gaining importance as sources of international capital in recent years. The expansion of FDI into and from China has come hand in hand with a rapid economic development and an increasing openness to the rest of the world, starting with the move from restrictive to permissive policies back in the late 1970s. It was actually during the permissive period that the central government established four special economic zones in Fujian and Guangdong provinces while at the same time offering special incentive policies for FDI in these trade zones.

China’s investment and trade reforms led to a surge in FDI which really began in the early 1990s. Such flows have been a great source of China’s rapid economic growth and productivity gains. In 2019 foreign-invested enterprises (FIEs) in China exceeded 1 million, employing more than 100 million workers or 20 percent of the country’s urban workforce. In fact, FIEs account for an important share of China’s industrial output and are responsible for a significant level of China’s international trade. The year 2019 saw the establishment of around 41,000 FIEs in China, with the total number of FIEs in China breaching the 1 million threshold to reach 1,001,377 in total.

A key aspect of China’s growth strategy and economic modernization during the 1980s and 1990s was to attract FDI into China as a way to encourage the development of domestic companies. At that time, investment by Chinese companies overseas was sharply restricted. In 2000, however, China’s leaders inaugurated a new “go global” strategy, aimed at encouraging Chinese firms to invest abroad. One major driving force of this investment is China’s massive accumulation of foreign exchange reserves. FIEs currently dominate high-tech exports in China. Foreign investment in China’s services industry was robust in 2019, with an increase of 12.5 percent to reach RMB 681.77 billion. Foreign investment in information technology services, information communications, and software rose by 30 percent, while for the leasing and commercial services sector the increase was almost 21 percent.

Another motivating factor behind the government’s decision to encourage more FDI outflows has been to obtain natural resources— especially from Africa—such as minerals and oils, considered by the central government as necessary to sustain China’s further economic growth. The Chinese government has also stated their goal of developing globally competitive Chinese firms. As China’s economy continues to grow, becoming a capital-surplus economy, national policies encourage the development of domestic brands that can be considered national and global champions. In this context, acquiring foreign firms, or investing in them, is regarded as a method for Chinese firms to become more globally competitive by obtaining management skills, high-tech knowledge, as well as internationally recognized brands. As a result, a growing number of Chinese enterprises are now among the world’s largest multinational corporations. Chinese firms are diversified and involved in a variety of industry sectors which, a few years ago, were state-owned, including manufacturing, banking, or natural resource exploitation. The top sources for outward FDI are mostly border and coastal provinces: Fujian, Guangdong, Heilongjiang, Jiangsu, Shandong, Shanghai, and Zhejiang. Altogether, they account for over 60 percent of China’s FDI outflows. In terms of industry preference, almost 50 percent of Chinese FDI outflow is injected into the service sector, 23 percent to targeted manufacturing, 22 percent to retail and wholesale, and 17 percent is poured into the mining industry.

Since 1978, China has taken a positive yet gradual reform approach in all policy aspects related to FDI. One of the most prominent features of these reforms has been the removal of restrictions on inward FDI in the Chinese economy. It is important to note that the ideas proposed by Deng Xiaoping in 1975 to introduce and acquire advanced technology and management methods from foreign countries were further developed in the following decades to allow inward FDI into China’s domestic economy. FDI was also a means of better utilizing China’s resources in the absence of domestic capital back then. During the last three to four decades, China’s change of attitude from restricting to encouraging inward FDI has been fully reflected by the evolution of its FDI policies. FDI inflows are expected to rise marginally in 2021 due to further modest growth of the global economy.

image

Source: MOFCOM

COVID-19 and the Future of Chinese FDI

Making predictions about the economic consequences of COVID-19 for China and the world is a thankless task. The global economic activity came to a halt in the majority of countries from March 2020 onwards as part of an effort to contain the spread of the virus. Economic decline was naturally expected in the following months.

As of late 2020 many economic activities have already resumed, and while it is not yet possible to determine the scale of the damage from the drop in global demand and supply, comparing recent data on business confidence in China and the United States, two countries that have an important impact on global investment flows, might provide a hint as to the future of global investment flows to China. In the chart below, we can see that China is following a different trend compared to the United States: business confidence in China is improving toward pre-pandemic levels.

image

Source: UNIDO (United Nations Industrial Development Organization), 2020.

Note: The chart uses the National Bureau of Statistics Manufacturing Purchasing Manager Index for China and the ISM Manufacturing Purchasing Manager Index for the United States.

What does this mean? At the most obvious level, it means that China is resuming work and production earlier than other countries, given that business confidence in most other countries is showing trends that are similar to the United States. It is important to note that monthly production data in China confirms this trend, as we see that manufacturing output rebounded sharply in March 2020.

Manufacturing production in China

image

In China, the GDP growth rate measures the change in the seasonally adjusted value of the goods and services produced by the Chinese economy. As China’s traditional growth engines of manufacturing and construction are slowing down, especially after the coronavirus pandemic, services have emerged as the new driver of the Chinese economy. In the last few quarters of 2020, strength in services and local consumption helped to offset weaker manufacturing and exports.

China’s GDP (2017 to 2020)

image

Source: China National Bureau of Statistics

China forecast: real GDP growth (2010 to 2021)

image

Source: International Monetary Fund forecast

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
18.207.240.205