China’s Round-Tripping FDI: Scale, Causes and Implications Dr. Geng XIAO The University of Hong Kong [email protected]20 November 2004 2004 LAEBA ANNUAL CONFERENCE The Emergence of China: Challenges and Opportunities for Latin America and Asia 3-4 December 2004, Beijing, China
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China’s Round-Tripping FDI: Scale, Causes and Implications
2004 LAEBA ANNUAL CONFERENCE The Emergence of China: Challenges and Opportunities for Latin America and Asia 3-4 December 2004, Beijing, China. China’s Round-Tripping FDI: Scale, Causes and Implications. Dr. Geng XIAO The University of Hong Kong [email protected] 20 November 2004. - PowerPoint PPT Presentation
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China’s Round-Tripping FDI:Scale, Causes and Implications
Source: The low, average and high estimates of China's capital flight is taken from Table 1 of the article "Capital flight from China: 1984-2001" by Frank R. Gunter, China Economic Review 15 (2004) 63-85. Other data is from Table 1 of this paper or calculated by the author.
Why Study Round-Tripping FDI in China?
•The prevailing view on China’s FDI:
–China attracted too much of the global FDI at the costs of other developing economies.
–Hence, China’s currency should be revaluated to restore the international balance in capital flows and competitiveness.
•How much of China’s FDI is round-tripping?
Incentives for China’s Round-Tripping FDI
1. Tax advantages and fiscal incentives
2. Property rights protection
3. Expectations on exchange control and exchange rate
4. Competitiveness of Hong Kong and overseas financial services
Two Types of Round Tripping:Rent-Seeking or Value-Seeking?
•Round tripping for escaping regulation– Creates no value added– Due to lack of property rights protection
•Round tripping for value added services– Creates value added through better offshore financing– Most cross-border mergers and acquisitions belong to round-tripping – Hong Kong as a modern international financial and trade centre at the heart of round-tripping
Estimating China’s Round Tripping FDI
•Table 10.1 to 10.6–Row A : FDI flows from the source region to China as reported by the source region.
–Row B: FDI flows from the source region to China as reported by China.
–Row C = Row B - Row A = the unverifiable FDI flows from the source region to China. Part of Row C is likely caused by round tripping FDI.
–Row D = Row C / Row B; which is the ratio of unverifiable FDI.
A = FDI from US to China as Reported by US 74 556 1232 261 933 1250 1497 1947 1817 1225 914B = FDI from US to China as Reported by China 511 2063 2491 3083 3443 3239 3898 4216 4384 4433 5424 3381C = B-A (Unverifiable part of the FDI flows from US to China) 437 1507 1259 2822 2510 1989 2401 2269 2567 3208 4510 2316D = (B-A)/B 85.5% 73.1% 50.5% 91.5% 72.9% 61.4% 61.6% 53.8% 58.6% 72.4% 83.1% 13.5% 68.5%High estimate of the average ratio of round tripping FDI from US to China 68.5%Middle estimate of the average ratio of round tripping FDI from US to China 61.8%Low estimate of the average ratio of round tripping FDI from US to China 55.1%
Table 10.1 Round Tripping FDI to China: The Case of U.S. (USD Million)
Source: US Department of Commerce, Bureau of Economic Analysis and China National Bureau of Statistics.
Dealing with Statistical Reporting Errors
•If there are no significant statistical reporting errors, Row D could be regarded as a proxy for the average ratio of round tripping FDI into China.
•If the statistical reporting errors are non-biased in the sense that they average to zero over the years, Row D would also be regarded as a close approximation of the round tripping FDI ratio.
•If the statistical reporting errors have systematic bias towards over-reporting by China side independent of the round tripping bias, we should then adjust Row D downward by the size of the systematic statistical reporting errors.
Size of Statistical Reporting Errors
•The standard deviation is a useful indicator on the likely range of both statistics reporting errors and the volatility of round tripping FDI.
•We assume the systematically biased statistics reporting errors is as large as one half of the standard deviation of Row C (the unverifiable part of FDI) during the observed period.
Country
FDI to US reported by
Source Country Unit of Left Column
Avearge Exchange Rate of
Dollar to other currencies
FDI to US reported by Source Country
in US$ MillionFDI Reported by
US in US$ Million
Over or under reporting by
U.S.Mexico 5062 million US$ 1 5,062 5,062 0%Brazil 106 million US$ 1 106 106 0%Finland 4417 million Euro 0.957 4,227 4,407 4%Canada 38987 million Canadian$ 0.6706 26,145 27,258 4%Hong Kong 2900 million HK$ 0.1282 372 669 44%UK 24249 million pound 1.5309 37,123 82,652 55%Japan 1520900 million yen 0.0093899 14,281 7,820 -83%Germany 30000 million Euro 0.957 28,710 14,054 -104%Sum of the above 116,025 142,028 18%
Table 10.7 Unverifiable FDI: The Case of U.S. in 2000
Source: U.S. Department of Commerce, Bureau of Economic Analsysis and United Nations Conference on Trade and Development.
1998 1999 2000 2001Standard Deviation
Weighted Average
FDI from Germany to China as Reported by Germany (Million Euro) 578 631 889 1050Dollar/Euro Exchange Rate (Average over the year) 1.09 1.02 0.95 0.85A = FDI from Germany to China as Reported by Germany (USD Million) 628 646 847 890B = FDI from Germany to China as Reported by China 737 1373 1041 1213 1091C = B-A (Unverifiable part of the FDI flows from Germany to China) 108 727 194 323 338D = (B-A)/B 14.7% 52.9% 18.7% 26.6% 17.2% 31.0%High estimate of the average ratio of round tripping FDI from Germany to China 31.0%Middle estimate of the average ratio of round tripping FDI from Japan to China 22.4%Low estimate of the average ratio of round tripping FDI from Germany to China 13.8%
Table 10.2. Round Tripping FDI to China: The Case of Germany (USD Million)
Source: Deutsche Bundesbank.
1996 1997 1998 1999 2000Standard Deviation
Weighted
AverageFDI from Japan to China as Reported by Japan (100 Million Yen) 2529 2251 1710 414 1010Yen/Dollar Exchange Rate (Average over the year) 109.18 121.76 131.19 113.22 108.34A = FDI from Japan to China as Reported by Japan (USD Million) 2316 1849 1304 366 932B = FDI from Japan to China as Reported by China 3679 4326 3400 2973 2916 3459C = B-A (Unverifiable part of the FDI flows from Japan to China) 1363 2477 2096 2607 1984 2106D = (B-A)/B 37.0% 57.3% 61.7% 87.7% 68.0% 18.3% 60.9%High estimate of the average ratio of round tripping FDI from Japan to China 60.9%Middle estimate of the average ratio of round tripping FDI from Japan to China 51.7%Low estimate of the average ratio of round tripping FDI from Japan to China 42.6%
Table 10.3 Round Tripping FDI to China: The Case of Japan (USD Million)
Weighted AverageFDI from Korea to China as Reported by
Korea 264 633 838 893 723 677 348 605 541 888 1350B = FDI from Korea to China as Reported by China 374 723 1043 1358 2142 1803 1275 1490 2152 2721 4490 1779C = B-A (Unverifiable part of the FDI flows from Korea to China) 110 90 205 465 1419 1126 927 885 1611 1833 3140 1074D = (B-A)/B 29.4% 12.4% 19.7% 34.2% 66.2% 62.5% 72.7% 59.4% 74.9% 67.4% 69.9% 23.0% 60.3%High estimate of the average ratio of round tripping FDI from Korea to China 60.3%Middle estimate of the average ratio of round tripping FDI from Korea to China 48.8%Low estimate of the average ratio of round tripping FDI from Korea to China 37.3%
Table 10.4 Round Tripping FDI to China: The Case of Korea (USD Million)
FDI from Taiwan to China as Reported by Taiwan 174 247 1140 962 1093 1229 1615 1519 1253 2607 2784B = FDI from Taiwan to China as Reported by China 2783 5543 9965 5395 5777 5141 2814 2982 3374 2293 2980 4459C = B-A (Unverifiable part of the FDI flows from Taiwan to China) 2609 5296 8825 4433 4684 3912 1199 1463 2121 -314 196 3129D = (B-A)/B 93.7% 95.5% 88.6% 82.2% 81.1% 76.1% 42.6% 49.1% 62.9% -13.7% 6.6% 36.2% 70.2%High estimate of the average ratio of round tripping FDI from Taiwan to China 70.2%Middle estimate of the average ratio of round tripping FDI from Taiwan to China 52.1%Low estimate of the average ratio of round tripping FDI from Taiwan to China 34.0%
Table 10.5. Round Tripping FDI to China: The Case of Taiwan Province (USD Million)
Source: from Table 6 in Tain-Jy Chen's article on "Will Taiwan Be Marginalized by China?", Asian Economic Papers, Volume 2, Number 2, page 84,2003.
1998 1999 2000 2001Standard Deviation
Weighted Average
FDI from Singapore to China as Reported by Singapore (Million Sinapore Dollar) 1709 2110 1441 832Dollar/Sinapore Dollar Exchange Rate (Average over the year) 0.59 0.60 0.59 0.56A = FDI from Singapore to China as Reported by Singapore (USD Million) 1013 1256 843 463B = FDI from Singapore to China as Reported by China 3404 2642 2172 2144 2591C = B-A (Unverifiable part of the FDI flows from Singapore to China) 2391 1387 1329 1681 1697D = (B-A)/B 70.2% 52.5% 61.2% 78.4% 11.2% 65.5%High estimate of the average ratio of round tripping FDI from Singapore to China 65.5%Middle estimate of the average ratio of round tripping FDI from Japan to China 59.9%Low estimate of the average ratio of round tripping FDI from Singapore to China 54.3%
Table 10.6 Round Tripping FDI to China: The Case of Singapore (USD Million)
Source: Singapore Department of Statistics and Statistical Yearbook of China.
The Case of Hong Kong
•The standard round tripping story for Hong Kong
•The complication due to the listing of Chinese companies in Hong Kong stock market
•The issue of offshore financial centre
1998 1999 2000 2001 2002 Standard Deviation
Weighted Average 1998-
2002A1 = FDI from Hong Kong to China as reported by Hong Kong 6.9 10.1 46.3 8.5 15.9 17.5A2 = FDI from Hong Kong to China excluding the communications sector as reported by Hong Kong (A1-A4) 4.2 7.8 13.1 3.9 4.5 6.7A3 = FDI from Hong Kong to China correcting over-reporting in communications sector by Hong Kong (A1-A4+B2) 5.9 9.3 14.1 4.8 5.4 7.9A4 = FDI from Hong Kong to China in communications sector as reported by Hong Kong 2.7 2.3 33.2 4.6 11.4 10.8B1 = FDI from Hong Kong to China as reported by China 18.5 16.4 15.4 16.7 17.86 17.0B2 = China's total FDI inflow in the transportation, storage, post and telecommunication services 1.6 1.6 1.0 0.9 0.9 1.2C1 = B1-A1 (Type 1 of the unverifiable FDI from Hong Kong)11.6 6.3 -30.9 8.2 2.0 -0.6D1 = (B1-A1)/B1 62.5% 38.6% -200.7% 49.1% 11.0% -3.4%C2 = B1-A2 (Type 2 of the unverifiable FDI from Hong Kong)14.3 8.6 2.3 12.8 13.4 10.3D2 = (B1-A2)/B1 77.1% 52.6% 14.9% 76.6% 74.8% 60.5%C3 = B1-A3 (Type 3 of unverifiable from Hong Kong) 12.6 7.1 1.3 11.9 12.4 9.1D3 = (B1-A3)/B1 68.2% 43.1% 8.3% 71.2% 69.7% 27.1% 53.4%High estimate of the average ratio of round tripping FDI from Hong Kong to China 53.4%Middle estimate of the average ratio of round tripping FDI from Hong Kong to China 39.9%Low estimate of the average ratio of round tripping FDI from Hong Kong to China 26.3%Source: China FDI statistics from the Statistical Yearbook of China; Hong Kong FDI Statistics from External Direct Investment
Table 13. Hong Kong's Round Tripping FDI Flows into China 1998-2002 (USD Billion)