Fdi in china

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 !!