Transcript Global Corporate Governance
ASIA @ RMIT
Trends in China’s Inward Foreign Direct Investment
Presenter: Dr John Gionea RMIT-TAFE Business School April 2009 1
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 2
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 3
Strong growth of China’s Inward FDI Flows(US$ million)
90 000 80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000 -
Source:
adapted from UNCTAD,WIR,2008 4
China annual FDI Inflows(US$ b.) and % share of global FDI inflows, 1990-2007
Why the % share decline?
90 80 70 60 50 14.0
12.0
10.0
8.0
40 30 6.0
4.0
20 10 2.0
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 0.0
China inflows China % share
Source:
adapted from UNCTAD,WIR,2008 5
Indices of annual growth of World FDI inflows and China FDI inflows(1990=100)
Source:
adapted from UNCTAD,WIR,2008 6
Trend growth rates(% p.a.) for China and other country/groups, 1994-2007
Middle East CIS India Africa Hong Kong European Union World average North America C& S America China SE Asia 9.0
8.9
6.7
28.9
24.3
22.6
16.9
14.7
14.6
12.3
% p.a.
China had a below world average growth of FDI inflows
5.5
Source:
adapted from UNCTAD,WIR,2008 7
Share of China’s FDI inflows and Inward FDI stock in China’s Gross Fixed Capital Formation(GFCF) and GDP, %, 1990-2007 18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
FDI inflows/GFCF Inward FDI Stock /GDP 2.0
The importance of Inward FDI For China’s economy has relatively declined
Source:
adapted from UNCTAD,WIR,2008 8
Comparative Inward FDI Stock as a % of GDP, selected economies,1990,2007
60 50 40 30 20 10 0
Australia 1990 2007 23.2
34.4
US 6.8
15.1
EU 10.6
40.9
Denmark China 6.8
47.1
5.1
10.1
New Zealand 18.1
55.6
Source:
adapted from UNCTAD,WIR,2008 9
US dollar/1 Yuan (average annual rates) The issue of China’s hard currency reserves (US$ 2000 billion!!!) 0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 Source: adapted from USDA data 10
Utilized FDI value(US$ Billion) and Number of FDI Projects, 1999-2008 100 90 80 70 60 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 Source: adapted from PRC Ministry of Commerce(MOFCOM) Utilized FDI(US$ B) No. of Projects 11
Top 10 FDI Investors in China 1979-88,% share, (Total US$ 28.4 B.)
70.8
H.Kong/Macao United States Japan Singapore West Germ any 1.9
1.1
4.7
8.5
Spain 0.7
The Netherlands 0.6
United Kingdom 0.6
Canada 0.6
France 0.5
% l Source: adapted from US China Business Council/ PRC Ministry of Commerce(MOFCOM) 12
Top 10 FDI Investors in China in 2008,% share, (Total US$92.4)
44.4
Hong Kong British Virgin Islands Singapore Japan Caym an Islands South Korea United States Western Sam oa Taiw an Mauritius 4.8
4.0
3.5
3.4
3.1
2.8
2.1
1.6
17.3
% Source: adapted from US China Business Council/ PRC Ministry of Commerce(MOFCOM 13
H.Kong/Macao
Top 10 Foreign Investors in China, % share, 1979-88 and 2008
2008: US$ 92.4 B 1979-88:US$ 28.4B. %
70.8
United States Japan West Germany 1.1
4.7
Singapore 1.9
8.5
Spain 0.7
The Netherlands 0.6
United Kingdom 0.6
Canada 0.6
France 0.5
%
Hong Kong British Virgin Islands Singapore Japan Cayman Islands South Korea United States Western Samoa Taiwan Mauritius 4.8
4.0
3.5
3.4
3.1
2.8
2.1
1.6
17.3
44.4
% Source: adapted from US China Business Council/ PRC Ministry of Commerce(MOFCOM 14
China’s FDI inflows by type of vehicle, %, 2006,2008
% of Total
40 30 20 10 80 70 60 50 0
2006 2008 EJVs 23 19 CJVs 3 2 WFOEs 74 78 FISVs 1 1
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.
15
Sectoral distribution of China’s FDI Inflows,%,2007
See comparative shares for Developing countries and the World on the next slide Other 22% Wholesale&Retail 2% Transport, storage&post 6% Leasing&Business services 6% Real Estate 11% Manufacturing 53% Source: adapted from US-China Business Council, February 2008 16
Sectoral distribution of FDI inflows(%) for developing countries and the world, 1989/91 and 2004/06
60 50 40
% of total
30 20 10
Primary Manufacturing Services
0
1989/91 2004/06 Developing 11.2
46.5
30.7
9.6
34 52.8
1989/91 6.9
34.2
50.4
2004/06 World 13.2
22.9
55.8
17
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.” 18
Annual Australian Outward FDI stock (A$M)in China, and China’s % share of Australian total, 1994-2007 1800 1600 1400 1200 1000 800 600 400 200 0 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07
Source: adapted from ABS 53520 - International Investment Position, Australia: Supplementary Statistics, 2007
0.6
0.5
0.4
0.3
0.2
0.1
0 A$M % 19
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?
20
China and the Financial crisis: Quarterly Real GDP Growth,2008 (year/year % change)
% y/y
6 4 2 0 12 10 8
% y/y change Q1 08 10.6
Q2 08 10.1
Q3 08 9 Q4 08 6.8
Source: adapted from FT China Confidential of 19/03/09 21
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 22 Source:adapted from Financial Times, China Confidential 19/03/09
References
• The US-China Business Council, 2008 and 2009 http://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 23
Foreign Direct Investment
FDI glossary 24
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’
.
25
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.
.
26
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 27
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.
28
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.
29