China And International Business

“Dunărea de Jos” University Galați

Faculty of Economy and Business Administration

Dissertation paper

China and International Business

Supervisor,

Prof. univ. dr. Mihaela NECULIȚĂ

Student,

Radu Andrei-Alexandru

Table of contents

I. Introduction ………………………………………………………………1

II. Literature review …………………………………………………………2

II. 1. Theoretical framework ………………………………………………..4

II. 2. Empirical research: FDI and currency zones ………………………….9

II. 3. Goals of the paper ……………………………………………………17

III. Analysis and Discussion ……………………………………………….18

IV. Conclusion ……………………………………………………………..49

References ………………………………………………………………….50

Annexes …………………………………………………………………….58

I.Introduction

This paper aims are to analyse the relation between China and the other economical powers of the world, and also the way in which this country managed to entry the worldwide market. It focuses, as well, on the factors that helped China to improve its economy. One of the main issue that made China’s ascension possible is FDI(Foreign Direct Investment). China is one of the most considerable countries from many points of view. It has the greatest population in the world (1.2 billion people). Related to purchasing power, China is the second largest economy, after United States and is expected that around year 2020 will occupy the first position, according to World Economic Forum.

What is quite distinctive about this country it’s political economy, meaning the way it pursues its own mode of transition from socialism through policies and institutional arrangements, transition which includes a progressive engagement with international business. Although the differences between other major economic powers and China are numerous and create difficulties, it’s involvement in international business can not be ignored or treated superficially.

As an example of difficulty, we can say that China presents an unusual degree of complexity and uncertainty for foreign-investing firms, a degree that does not necessarily favor the strategies Multinational Corporations pursue elsewhere. As a result many firms are quite disappointed with the returns resulted from the investment. On the other hand, Chinese firms are not always successful in investing abroad.

So, China’s impact in international business has positive effects but also negative ones, both for the investing firms and also for home market. But, with all this, China continues to invest more and more, growing its implications in world economy.

That’s why this paper will analyse the impact this country is beginning to have more and more over the entire globe economy, and also will try to identify the facts that helped China in this process of entrying the world trading market.

Over time, many economists wrote about that subject, China attracting more and more interest, especially by its curve of expansion. Despite most of the articles published, that have studied the same topic, and which obtained a positive impact, this paper intend to improve the analysis maily by enlarging the time period analysed.

This paper analysis the impact of China over the whole world economy and also all the facts that leaded to such a great expansion that the country had until now and still has.

II. Literature review

II.1. Theoretical framework

If we want to talk about the entry process of a country in the world business, basically we are talking about the relation between that country and international business. So, for a better understanding we have to fully get the sense of that term.

“The international business can be defined as the study of multinational companies.”

A multinational company or enterprise is a firm that has a economically worldwide impact above several foreign markets. Examples of MNEs are the well-known fast-foods chains(Mc Donalds, King Burger or Yum Brands), vehicle manufactors such as General Motors, Ford, Toyota), or enterprises which focuss more on tehnology(Sony, LG, Samsung).

In a different way of saying, international business is a complex term that refers to all the commercial transactions, which can be: sales, investments, logistics, transactions between two or more countries. So, every cross-border transaction of goods, services or resources(capital, people, skills) is framed in the concept of international business.

The company’s objectives are a decisive factor in the process of how the international operations are conducted. This operations affect and are also affected by the competitive environment of the market in which the enterprise is trying to entry. These objectives could be sales expansion, risk minimization or simply, diversification.

The main type of operations that the firms do in order to realize international business are imports and exports and investments.

An extremely important factor that influnces the whole process is the choice of the entry mode in the foreign market. These modes are numerous and have to be carefully chosen. Examples of modes used by enterprises in order to entry different markets can be importing, exporting, tourism, licensing and franchising, or the investmens( direct or portofolio ones).

Once an enterprise decides to do international business with other market, it has to take into consideration the fact that it can occur some risks during the process.

These risks could be strategic, political, operational, technological, economical, financial or related to the environment of the market in which the firm wants to entry. Also, terrorism and bribery can be a factor that influences the process.

But, despite this, there has been a growth in the process of globalization of international business. This growth, which lasts for several decades, is happening because of some factors like: expansion of technology, the restrictions of doing international business are more and more restricted by governments, the wish of consumers to find out more things about foreign goods and services is stronger. Also, political issues have been solved, or almost solved, between the major economic powers of the world and they cooperate more and more to solve the issues of the developing countries.

Another definition is the one according to which the international business are the sum of commercial transactions made by private enterprises and/or governamental institutions, which implies 2 or more countries.

There are 4 main objectives which can determine a company to make international business:

the growth of sales;

the acquisition of resources;

diversification of the supply;

minimization of the risk.

The developing of the international business has many economical, social, political or even geographical factors such as:

the movements in global geopolitiand also in borders;

the development of the technology;

liberalization of circulation at the border;

the development of the accords that sustain global economy;

global competition.

The international economic business presents a series of characteristics:

interdependences between the countries are bigger and bigger;

international business play an important role in economical social progress of the whole countries;

the growth of international trade;

the diversification of international business;

the internalization of business.

So, international business is a very complex process which is treated more and more seriously by more and more countries.

One extremely used way by many regions that want to do international business is to invest in other markets. Foreign direct investmenăăăts(FDI) are, basically, the using of a country’s resources in other markets.

FDI are financial streams which passes the country borders. The criteria which distinguish the foreign investments from the internal ones is that the investor and the receptor has different residences. The purpose of FDI is obtaining the income.

So, foreign direct investment is basically a long-term investment between a resident entitity and a unresident one; usually it implies a semnificative managerial influence from the investor in the enterprise he invested.

According to the United Nations Conference on Trade and Development, FDI is a long-term relation, reflecting the investor’s interest, and also, his real possibility to control the enterprise situated in the foreign country, where he invests in.

Speaking about FDI forms, we can affirm that, according to the investment objectives, there are:

FDIs for resources;

FDIs for markets;

FDIs for efficiency;

FDIs for strategic actives;

other FDIs.

As forms of cooperation we can remind joint ventures(the mixt enterprises), international underproduction (of capacity or speciality), franchise or buy-back(the delivery of equipaments and machinery on credit, repayable in products).

The most FDI happens between the major economical forces like Western Europe, U.S., Japan. The entity that invests can be a government, an enterprise or just an individual.

The investor will try to gain access in the market by using some methods like:

by incorporating a wholly owned subsidiary or company anywhere

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise

participating in an equity joint venture with another investor or enterprise.

Foreign direct investment have some incentives that may take different forms as:

low corporate tax and individual income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

EPZ – Export Processing Zones

Bonded warehouses

Maquiladoras

investment financial subsidies

free land or land subsidies

relocation & expatriation

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects)

FDI is strongly related to the economy of the country. A growth in FDI’s level means a growth in the country’s economy due to the influx of capital and increased taxes for the host region. Furthermore, FDI can result in the transfer of soft skills, more access to other technologies or researches.

According to the geographical repartition, we can observe that the highest volume of FDI was realized in Europe, 50,46% of the whole FDI, in 2007, being over 925 millions American dollars. Aproximately 800 millions were invested in the UE members. On the second position is North America with 25%, followed by Asia(17,42%). Last 2 positions are occupied by South America (3,91%) and Africa with only 2,89%. The determined factors of FDI are multiple, economic, social and politic.

They can have an important influence over the inputs and outputs. So, there is a very strong relation between the economic growth and foreign direct investment streams.

Foreign investment robustly increases local productivity growth, according to a meta-analyssis of the effects of FDI on local firms, made in 2010.

According to an agreement made by United Nations Conference for Trade and Developing, in 2013, the global level of FDI reached 1,46 trillion dollars, 11% more than in 2012. It was the second consequtively year when the FDI stream to the developed countries was 39% of the total amount. The developing economies absorbed 61% of the total FDIs. The data shows that more and more investors are attracted by the countries that are still developing. From the first 20 global destinations for FDI, half of them are still in the ‘growing’ process. This countries attracted 609 billions dollars while the developed countries absorbed 503 billions.

Anyway, United States represents the main destination for foreign direct investments, with 159 billion dollars. It remains a unique country if we speak abouth the level of attracting the foreign capital.China is on the second position with 127 billion dollars.

In the past, the developed countries used to invest exlusevely in countries at the same level. The developing of the emergent world leaded to more investments in the areas which were growing. Nowadays the main attraction for FDIs are the emergent countries, except U.S.A.

A sure affirmation is that foreign direct investments bring a special contribution at the economic growth. These create new work places, facilitate the create of resources, allow the technological transfer and also stimulate the trade.

The business enterprise needs economical freedomand friendly fiscality for enterpreneurs, inclusively the foreign ones.

Creating a favourable economic environment through promovating some conditions for attracting the foreign investors, such as: a fair, equal. unracist treatment, protection against illegal expropriations, the transformation of the area in an atractiv environment from a fiscal point of view.

The foreign direct investments are also influenced by some determinating factors such as:

the relationship between GDP and FDI

the correlation between GDP/capita and FDI

the influence of inflation rate over the FDI streams

the potential influence of imports and exports over FDI streams

The countries that are at their very beginning start of developing attracted a record sum of FDI(33 billions USD), and to the south-east European countries were invested approximately 114 billions USD. The main domains that attract FDIs at a global level are agriculture, energy and constructions.

In a word-wide economic meaning, FDI plays a very important role. They are meant to bring significant benefits to the host country such as: capital streams growings, technological advances tehniques, strengthen the buying power of the region and lastly but not leastly, the role to deep the boundaries with world economic environment, a very developing one.

Speciality studies shown that developed countries, the main FDI atractors, obtain significantly more benfits than the developing regions. Conceptualy, the positive implications at a macroeconomic level refer mainly to the following aspects:

II.2. Empirical research

While strong policy support fueled economic growth at the end of Q1, data for April suggest that policymakers took their foot off the gas pedal amid concerns that government-led credit growth could exacerbate domestic imbalances and derail much-needed economic reforms. So far this year, Chinese authorities’ moves are in line with their objective to gradually implement economic reforms and tolerate slower growth, but also to step in if growth should fall below the threshold level established in March. While weaker economic indicators were seen across the board, the rebound in the property market remained intact in April, which is expected to buttress growth in the short term.

Economic Overview 

The Chinese economy experienced astonishing growth in the last few decades that catapulted the country to become the world's second largest economy. In 1978—when China started the program of economic reforms—the country ranked ninth in nominal gross domestic product (GDP) with USD 214 billion; 35 years later it jumped up to second place with a nominal GDP of USD 9.2 trillion. 

Since the introduction of the economic reforms in 1978, China has become the world’s manufacturing hub, where the secondary sector (comprising industry and construction) represented the largest share of GDP.

However, in recent years, China’s modernization propelled the tertiary sector and, in 2013, it became the largest category of GDP with a share of 46.1%, while the secondary sector still accounted for a sizeable 45.0% of the country’s total output. Meanwhile, the primary sector’s weight in GDP has shrunk dramatically since the country opened to the world. 

China weathered the global economic crisis better than most other countries. In November 2008, the State Council unveiled a CNY 4.0 trillion (USD 585 billion) stimulus package in an attempt to shield the country from the worst effects of the financial crisis.

The massive stimulus program fuelled economic growth mostly through massive investment projects, which triggered concerns that the country could have been building up asset bubbles, overinvestment and excess capacity in some industries. Given the solid fiscal position of the government, the stimulus measures did not derail China’s public finances. The global downturn and the subsequent slowdown in demand did, however, severely affect the external sector and the current account surplus has continuously diminished since the financial crisis. 

Apparently, China exited the financial crisis in good shape, with GDP growing above 9%, low inflation and a sound fiscal position. However, the policies implemented during the crisis to foster economic growth exacerbated the country’s macroeconomic imbalances. Particularly, the stimulus program bolstered investment, while households’ consumption remained repressed. In order to tackle these imbalances, the new administration of President Xi Jinping and Premier Li Keqiang started to unveil economic measures aimed at promoting a more balanced economic model at the expense of the once-sacred rapid economic growth. 

China’s Balance of payments

China’s external position is extremely solid. The current account has recorded a surplus in every year since 1994. The capital account followed suit and only recorded two deficits in the last 20 years. This situation of surpluses in the both the current and the capital put pressure on the national currency and prompted the Central Bank to sterilize most of the foreign currency that entered the country. As a result, China’s foreign exchange reserves skyrocketed to almost USD 4.0 trillion in 2014.

The current account surplus reached its peak in 2007, when it represented 10.1% of GDP. Since then, however, the surplus has narrowed and in 2013 it fell to only 2.0% of GDP. 

China’s capital account has bold controls, which implies that the country lacks the freedom to convert local financial assets into foreign financial assets at a market-determined exchange rate and vice versa. The new Xi-Li administration and the People’s Bank of China vowed to accelerate interest rate liberalization and capital account convertibility. In this regard, Chinese authorities have started to implement some measures, such as removing a cap on foreign-currency deposit rates in Shanghai. 

The capital account benefited from strong inflows of Foreign Direct Investment (FDI). FDI has performed strongly in the last decade, with record inflows of USD 118 billion in 2013, thereby becoming the second largest recipient of foreign investment.

Among the countries that invest more in China are Hong Kong, Singapore, Japan, Taiwan, and the United States. In addition, China’s outward investment soared in recent years and, according to some analysts, the country could become a net exporter of capital in the coming years. 

China’s Trade Structure

China has experienced interrupted merchandise trade surpluses since 1993. Total trade multiplied by nearly 100 to USD 4.2 trillion in only three decades and, in 2013, China surpassed the United States as the world’s biggest trading nation. 

The opening of the country and the government’s massive investment programs have prompted the country to become a major manufacturing hub. This situation fostered trade growth in the last decades, particularly after China joined the World Trade Organization in 2001. As an economy highly integrated into the global trade system, the country benefited from a steady improvement in its terms of trade since 2000. However, the global economic downturn in 2008-2009 led the country to reduce manufacturing output, thus putting a drag on China’s trading sector. 

Moreover, the country has engaged in several bilateral and multilateral trade agreements that have opened new markets for its products. In 2003, China signed the Closer Economic Partnership Arrangement with Hong Kong and Macau. A Free Trade Agreement (FTA) between China and the ASEAN nations came into effect on January 2010, which created the world’s third largest free trade area in terms of nominal GDP. China also established, among others, FTA with countries such as Chile, Costa Rica, Pakistan, Peru, New Zealand, Thailand and Singapore. Moreover, there are other FTA under negotiation with Australia, the Gulf Cooperation Council, Japan, Korea and Norway. 

Exports from China

Electronics and machinery make up around 55% of total exports, garments account for 13% and construction material and equipment represent 7%. Sales to Asia represent over 40% of total shipments, while North America and Europe have an export share of 24% and 23%, respectively. Although exports to Africa and South America expanded rapidly, they only account for 8% of total shipments. 

Due to favorable global trade conditions and China’s accession to the World Trade Organization in December 2001, the country has experienced an astonishing growth of 26.9% annually in real goods and services exports during the 2002-2008 period. 

While exports contracted sharply in 2009 due to the downturn in global demand, shipments in 2010 and 2011 rebounded strongly following the 2008 financial crisis. In 2012 and 2013, export growth averaged 7.8%.

In nominal terms, merchandise exports jumped from just USD 267 billion in 2001 to USD 2.2 trillion in 2013, which represents annual average growth of 20.2%. According to FocusEconomics Consensus Forecast panelists’ projections from September 2014, Chinese exports are expected to slow to a 6.6% increase in 2014 following an expansion of 7.9% in 2013. Panelists see exports picking up in 2015 to an 8.8% expansion. 

Imports to China

In order to supply factories and support China’s rapid development, the country’s imports are mostly dominated by intermediate goods and a wide range of commodities, including oil, iron ore, copper and cereals.

China’s soaring demand for raw materials has pushed global commodity prices up in recent years, thereby boosting the coffers of many developing nations and commodity-exporting economies. 

Supply of imports into China is mostly dominated by Asian countries, with a combined share of nearly 50% of total imports. Purchases from Europe and North America account for 17% and 10%, respectively. As a major global buyer of commodities, imports from Africa, Australia, the Middle East and South America have increased strongly in the last decade to represent a combined share of around 23%.

In parallel with skyrocketing exports, growth in imports of real goods and services soared in the 2002-2008 period, recording an annual average expansion of 24.4%. Imports experienced a contraction in 2009 due to the global crisis, but recovered quickly in 2010 and 2011. In the 2012-2013 period, imports recorded a modest increase of 7.2%.

In nominal terms, merchandise imports increased more than eight-fold in the 2001-2013 period, increasing from USD 244 billion in 2001 to USD 2.0 trillion in 2013. FocusEconomics Consensus Forecast panelists’ projections from September 2014 show Chinese imports moderating slightly from a 7.3% increase in 2013 to a 6.9% expansion in 2014. In 2015, panelists expect imports to accelerate to a 9.3% expansion. 

China’s Economic Policy

Economic growth soared in the last few decades mainly due to the country’s increasing integration into the global economy and the government’s bold support for economic activity. However, the successful economic model that lifted hundreds of millions out of poverty and fueled the country’s astonishing economic and social development has also brought many challenges. Severe economic imbalances, mounting environmental issues, rising economic inequality and an aging population are the key questions that the new administration lead by President Xi Jinping will have to tackle in the near future in order to ensure the country’s sustainability. 

The final communique of the Third Plenary Session of the 18thChina Communist Party (CPC)’s Central Committee held in Beijing on 9-12 November 2013 unveiled an ambitious road map for economic reform. Chinese authorities vowed to deepen economic reform and give the market a decisive role in allocating resources.

That said, they reaffirmed the leading role of the state in the economy. Authorities also stressed the need to promote market-oriented reforms in state-owned companies and to accelerate interest rate liberalization, capital account convertibility and exchange rate reform. According to the Plenum communique , reforming the hukou system of household registration, enhancing farmers’ property rights, further development of social welfare, improving the judiciary system and promoting a more developed fiscal system would be on the agenda. In addition, Xi launched an aggressive anti-corruption campaign, which targeted senior officials of the Communist Party. 

Although gradual, Chinese authorities have already unveiled a series of reforms in a wide range of sectors, signaling Xi Jinping and Li Keqiang’s commitment to push forward their agenda. 

China’s Fiscal Policy

Before 1978, China had a highly centralized fiscal system, which mainly reflected the country’s planned economic system. The central government collected all revenues and allocated all the spending of the administration and public institutions. In parallel with the reforms implemented in the country for Deng Xiaoping, the government started to decentralize the fiscal system. 

In 1994, the government launched a bold fiscal reform in order to struggle against a rapid decline in the tax/GDP ratio, which dampened the government’s ability to conduct macroeconomic and redistribution policies.

The flagship of the reform was a new taxation system and the adoption of a tax-sharing scheme, where the most lucrative sources of tax revenues, such as the Value-Added Tax and the Enterprise Income Tax, were administrated by the central government. 

The result of this reform was a steady increase in revenues, which jumped from 10.8% of GDP in 1994 to 22.7% of GDP in 2013.

While expenditures followed suit and increased at a double-digit rate in the same period, the fiscal deficit was kept in check. In the 1994-2013 period, the government’s fiscal deficit averaged 1.4% of GDP. 

The new system, however, left local government with just few sources of revenue and they had to rely on land sales and indirect borrowing (mostly so-called “shadow banking”) to finance their activity. In addition, local governments put in place off-budget local government financing vehicles to raise funds and finance investment projects. According to data released by the National Audit Office in December 2013, the total amount of debt held by local governments was CNY 17.9 trillion (USD 3.0 trillion) or 33.0% of GDP, which was well above the CNY 10.7 trillion reported in the 2010 audit. 

Although debt is still at manageable levels, the government should be wary of both the increase in reliance on shadow banking and the rapid pace of debt accumulation. Moreover, the government should increase the revenue sources for local governments. In this regard, in August 2014, the National People’s Congress passed amendments to the budget law, allowing provincial government to issue bonds directly and increase transparency. This move paves the way for local governments to raise debt in the bond market. 

China’s government debt is almost entirely denominated in local currency and owned by domestic institutions. In addition, the government has cash savings equivalent to 6% of GDP in the People’s Bank of China. This situation shields the economy against government debt crises. 

China’s Monetary Policy

Under the guidance of the State Council, the People’s Bank of China (PBOC) formulates and implements monetary policy, prevents and resolves financial risks, and safeguards financial stability. The PBOC’s main objectives are: ensuring domestic price stability, managing the exchange rate and promoting economic growth. At the beginning of each year, the State Council establishes guiding targets for GDP, the Consumer Price Index (CPI), money supply (M2) and credit growth. The PBOC’s policy rate is the one-year lending rate. The Bank’s last change in its key policy rate was in July 2012 and the lending rate has remained at 6.00% since then.

In monetary policy reports from Q1 and Q2 2014, the Central Bank vowed to maintain a “prudent” monetary policy while conducting policy fine-tuning at an appropriate time. 

The Central Bank manages money supply through Open Market Operations (OMO), which are conducted with both domestic and foreign currencies and comprise repo and reverse repo, government securities and PBOC bills. The Bank also uses the reserve requirement ratio to influence lending and liquidity. The reserve requirement ratio for major lenders currently sits at 20.0%, where it has rested since May 2012. Other instruments that the Central Bank uses to manage and adjust liquidity in the banking system are short-term loans, short-term liquidity and standing lending facility operations. 

The agenda of China’s top authorities include bold reforms on interest rate and monetary policy management in order to adopt a more market-driven approach. 

China’s Exchange Rate Policy

The IMF labels China’s exchange rate regime as a crawl-like arrangement. The speed and direction of the crawling peg is decided by Chinese authorities according to domestic and international economic developments. The PBOC classifies its regime as a managed floating exchange rate regime based on market supply and demand with reference to an undisclosed basket of currencies. The U.S. dollar is likely to represent a large stake of the basket. The yuan fluctuates in an intraday trading band around an official midpoint rate. On 15 March, the PBOC widened the trading band from +/-1 to +/-2. 

From 1995 to 2005, China kept its currency fixed versus the U.S. dollar at around 8.28 CNY per USD. This was the case until 2005, when it switched to a managed float of the currency to facilitate a controlled appreciation of the CNY. However, in the wake of the global financial crisis, China pegged its currency to the USD at 6.82 CNY per USD from June 2008 to June 2010. In 2010, the PBOC allowed the yuan to trade more flexibly. While the Chinese yuan is freely convertible under the current account, it remains strictly regulated in the capital account. Chinese authorities expressed their willingness to allow the yuan to be fully convertible in the near future. 

II.3. Goals of the paper

This paper aims to analyse the economic situation of China, and also, the influence that country has over the evolution of the entire global economic environment. China’s economy has suffered a series of spectaculous evolutions that transformed that country in the second big power of the world, and soon, it is expected to become the first one.That problem was analysed by many experts in so different ways, but according to all thei opinions China was the country with the most important change in economical system from all the countries during the past decades.

That paper is different from all the analyses realized before because it tries to show, through comparison to USA and the Europe Union, the economical evolution China went through from 1940 to nowadays. In this analyse, I tried to show the growth of the country, analyzing as many economical factors as possible.

As it can be seen in the structure of the paper, not only that China has grown in all the economical sectors, but also that it had a huge impact over the whole world, monetary speaking, and it hasn’t stop, more and more states of the globe starting to be sort of dependent of that country.

Another goal of this analyse would be to analyse how China managed to transform itself in a very powerful country in the economic field because it is a very useful lesson for the many developing countries. The way that country managed to reach that point is an extremely good plan to improve a country that was at the medium level in a economical top.

III. Analysis and discussion

THE FOREIGN INVESTMENT CLIMATE IN CHINA

Recent trends in foreign direct investment (FDI) inflows to China

China’s FDI inflows held up well during the global crisis and have recovered strongly

China has made impressive progress in developing a regulatory framework to attract and promote investment over the past three decades, though challenges remain.Policies to encourage foreign direct investment (FDI) have been highly successful.

Despite increasing competition from other investment destinations in recent years, China continues to be cited as a favourite destination for foreign direct investment in surveys of investor sentiment.

This sentiment is supported by the statistics: by 2010, China had accumulated FDI stock of USD 579 billion, well ahead of other large developing and transition economies, and from 2000 to 2016 China each year received larger FDI inflows than any other developing or transition economy.

During the recent global economic crisis, the fall in FDI to China was small compared to the global FDI contraction, indicating – as in the 1997-1998 Asian economic crisis, when FDI flows to China also held up well while collapsing elsewhere in the region – that China is seen as a risk-avoidance haven. In 2010, FDI inflows to China recovered strongly, by 17.4% year-on-year to reach a record high of USD 105.7 billion.In 2011, realized FDI rose 11.3% to USD 117.7 billion before decreasing by 3.7% to USD 113.3 in 2012.

Foreign direct investment in non financial sector in China increased 3.8 percent year-on-year to CNY343.55 hundred million in the first five months of 2016. From January to May, investment in the services sector was up 7.0 percent to CNY241.8 hundred million, representing 70.4 percent of total FDI. In contrast, foreign investment in the manufacturing sector fell 3.2 percent to 98.8 CNY hundred million, accounting for 28.8 percent share. Foreign Direct Investment in China averaged 415.63 USD HML from 1997 until 2016, reaching an all time high of 1262.70 USD HML in December of 2015 and a record low of 18.32 USD HML in January of 2000. Foreign Direct Investment in China is reported by the Ministry of Commerce of the People's Republic of China.

The geographical distribution of China’s FDI inflows is not precisely known

As in previous years, Asia remains the dominant source of FDI inflows (see Table 1, below), with ten Asian economies providing 66.6% in 2010, the latest year for which MOFCOM currently provides data on its website. Hong Kong (China) has been the largest single FDI source since the country opened to foreign investment in the late 1970s. While there are some large investors based in Hong Kong (China), there is undoubtedly a high proportion of capital routed through Hong Kong (China) from other parts of the world, as well as continued “round-tripping” of Chinese investment – though the motive for this is weaker since tax incentives for foreign investment were withdrawn in 2008 when China adopted a uniform tax system for domestic and foreign enterprises.

Indirect routing and round-tripping may also explain the importance of five jurisdictions (Mauritius, Barbados, the Cayman Islands, British Virgin Islands and Samoa) that provided over 14% of China’s FDI inflows in 2010; by contrast, the European Union and North America combined show up then only as supplying 8%.

More is known about the regional destination of IFDI. In recent years wage and other upward cost pressures have shifted economic growth westward from the Eastern Region to the Central and Western Regions. Market forces have made investment in hinterland more convenient, something that a deliberate policy of investing in investment construction had initially failed to achieve. Still, in 2010, the most recent year for which figures have been published, the Eastern Region continued to absorb the overwhelming majority of foreign investment by number of projects and utilised foreign investment value.

Where Is China Sending its Investments?

As reported by China’s Ministry of Commerce (MOFCOM), China’s OFDI is largely concentrated in Asia (mainly in Hong Kong), although investment has increased significantly in Latin America and Africa over the past five years.

The Final Destinations of China’s OFDI

Despite the reported concentration of Chinese investments within Asia, official Chinese OFDI statistics may not fully reflect the final destinations of China’s OFDI. Like companies from many countries, some Chinese companies initially invest in tax havens or offshore financial centers where there is minimal or no tax, such as Hong Kong or the Cayman Islands. Then, these companies reinvest this same money in other destinations, such as Africa and Latin America, through their subsidiaries in these offshore financial centers. Official Chinese OFDI only indicates the initial destination of investments. The graphic below illustrates China’s OFDI stock in each region, and also extracts potential flows to OFCs.

For example, many major mergers and acquisitions occur using money that initially flows through Hong Kong. In 2015, Sinopec, China’s biggest oil refiner, acquired 30 percent of Galp Energia (Brazil) for $5.2 billion through its Hong Kong subsidiary, Sinopec International Petroleum Exploration and Development Corporation (SIPC). This $5.2 billion would be recorded as OFDI in Hong Kong, rather than in Brazil.

Sectors Receiving Chinese Investments

By the end of 2014, 90 percent of China’s OFDI was invested in six sectors—leasing and business services (33 percent), finance (18 percent), mining (14 percent), wholesale and retail trade (13 percent), transportation and storage (6 percent) and manufacturing (6 percent). However, this may not reflect the whole story. Meanwhile, domestically, the majority of China’s loans were invested in the manufacturing sector, as China accounted for 22.4 percent of world manufacturing in 2015, the largest in the world.

Regional Spotlight: China’s Presence in Africa

China’s OFDI in Africa is accelerating rapidly, increasing from $1 billion in 2004 to $24.5 billion in 2013. A large amount of the inventions.

A large amount of the investments went to extractive industries, such as mining and oil extraction.

China’s OFDI Stock in Africa

By the end of 2013, 4 percent of China’s OFDI stock, or $26.2 billion, was in Africa. By 2013, the top eight recipients accounted for 61 percent of China’s OFDI stock in Africa, with South Africa alone receiving 22 percent of China’s OFDI in Africa.

WFOEs remain dominant, but there has been a slight revival of equity joint ventures

Wholly-foreign-owned enterprises (WFOEs) became the dominant form of FDI in China in the first decade of this century, rising from 47.3% of total realized FDI value in 2000to 78.3% in 2008 before edging below 77% in 2009 and 2010 before rising slightly to 78.6% in 2013 and 77.1% in 2014. The turn to WFOEs has been largely motivated by a mistrust of Chinese joint-venture partners and facilitated by regulatory liberalisation, which allowed greater scope both for establishing greenfield investments and also for acquiring Chinese enterprises, and greater experience of the Chinese market.Foreign investors are now also much more familiar with China, its culture and the peculiarities of its business environment than they were when the country was first opened to investment (and to foreigners).

During the recent period, the next largest category, equity joint ventures, fell from 35.2% of the total in 2000 to 18.7% in 2008, then rose to 19.2% in 2009, 21.3% in 2010, before edging down to 18.6 in 2011 and edging back up to 19.4% in 2014. Renewed interest by foreign investors in joining forces with China’s domestic enterprises has apparently been provoked by the greater difficulty of acquiring local companies resulting from competition from Chinese firms and the improvement in quality of potential partners.The continued operation of these factors can be expected to maintain interest in equity joint ventures.

Other modes of FDI entry remain unimportant. Contractual joint ventures, which had accounted for between a quarter and one-third of FDI in the first half of the 1980s, fell from 16.2% in 2000 to 2.1% in 2012. Joint exploration and compensation trade, which had together initially accounted for half of China’s FDI inflows, have dwindled into insignificance.

Joint exploration and compensation trade, which had together initially accounted for half of China’s FDI inflows, have dwindled into insignificance.

FDI has now reached a watershed

FDI to China’s economy, having climbed rapidly in previous years, started to reach a plateau in the second half of the 2000s. While still important, FDI is no longer an increasing contributor to China’s trade surplus, its industrial output, its fixed investment or its tax revenues.

Local authorities have continued to strive to expand the absolute size of FDI inflows into their regions. By contrast, the central government’s priority has shifted to improving the quality of FDI rather than just increasing its quantity. FDI plays a crucial role in bringing in new technology to China, where massive domestic spending on science and technology have not yet brought about a matching increase in innovation. A major focus of government policy has been to encourage leading multinationals to shift their R&D centres to China, while technological innovation has increasingly been stressed in the country’s system of catalogues for guiding inward FDI.

The deceleration of FDI inflows has not posed a major problem because it is in major part due to the internal dynamism of China’s domestic economy, in particular the development of successful large domestic enterprises whose own contribution to the economy is growing faster than that of foreign-invested enterprises (FIEs). Seen in this light, the end of rapid growth of the FIE share in the Chinese economy is natural, a symptom of the development and maturing of China’s economy.

Policy-makers may, however, worry that investors – including China’s own domestic investors, who now have large sums to invest – are beginning to look further afield for the kind of advantages they previously sought and found in China. This tendency, in part an inevitable result of China’s new-found prosperity, may be accentuated by the more selective FDI policy régime that appears to have been developing in China in recent years.

Foreign-invested enterprises’ dominance of China’s foreign trade is moderating –

The FIEs’ share in China’s foreign trade, having risen from nothing at the beginning of the reform period to a peak of 58.5% in 2005, moderated subsequently to 53.8% in 2010, 51.1% in 2012 and 49% in 2012.

FIEs are an important contributor to the country’s massive trade surplus, which has until recently been a major policy goal. From 1986 to 1997 FIE imports exceeded FIE exports; from 1998 onwards, FIEs have recorded a large surplus of exports over imports (see below for details).The government can take comfort from the fact that domestic enterprises are now pulling their weight in the export market, but it would presumably not wish to see the trade surplus of foreign-invested enterprises, an important earner of foreign currency, decline too far.

In the early period of FDI attraction up to 1997, FIEs’ imports exceeded their exports each year. From 1998 FIEs produced a trade surplus which accelerated rapidly from USD14 billion in 2004 to a peak of USD171 billion in 2008 before falling to USD127 billion in 2009 and USD124 billion in 2010, then recovering modestly to USD 130.5 billion in 2014 even 151.5 in 2015.

Figure 5. Realised FDI as a percentage of gross fixed capital formation in China, 1992-2010

18

16

14

12

10

8

6

4

2

0

Source: MOFCOM website: www.fdi.gov.cn.

The share of foreign-related tax revenue has stabilised

In 1992, the year in which FDI began a major acceleration, total foreign-related tax revenue from industry and commerce (excluding customs duties and land fees) amounted to CNY 12.2 billion, just under 4.3% of national tax revenues from industry and commerce. Tax revenue from foreign-invested enterprises rose far faster than from domestic industry and commerce during the 1990s, so that by 2000 foreign-related tax revenue had reached CNY 221.7 billion, 17.5% of the total. From 2001 to 2014, the proportion remained remarkably stable at around 20%-21%, despite the marked shift from manufacturing to services FDI during that period (see below).

Figure 6. Foreign-related tax revenue as a percentage of total tax revenue from industry and commerce, 1992-2010

25

20

15

10

5

0

Source: MOFCOM website: www.fdi.gov.cn.

Developments in government policies towards foreign investment since 2008

Some FDI administrative streamlining has taken place since the 2008 OECD Review

The Chinese government has taken a number of measures to streamline foreign investment administration since the publication of 2008 OECD Investment Policy Review of China. A number of changes in the foreign investment administration regime were announced in a circular of the State Council, China’s cabinet, on 6 April 2010.

The most important change is the raising of the ceiling on provincial examination and approval authority over foreign investment projects in the “permitted catalogue”34 from a total investment of USD100 million to USD300 million. The State Council circular specifies that this delegation of approval applies not only to manufacturing but also to service industries.

Projects in the “restricted catalogue” remain unchanged, with provincial-level approval up to USD50 million. This applies both to central and local organs of the Ministry of Commerce (MOFCOM)and of the National Development and Reform Commission (NDRC). This delegation of FIE approval power to the provinces continues the trend started in 2004, when the USD100 million limit for provincial approval of projects in the “permitted” and “encouraged” catalogues was put in place. In 2009, MOFCOM delegated approval authority for “encouraged” investment projects to its provincial offices, except in cases involving the national interest and also the authority to approve changes in FIEs already established with central MOFCOM approval. At the same time, MOFCOM allowed provinces for the first time to examine and approve the establishment of investment (holding) companies up to the then general limit of USD100 million. In this and subsequent devolvements, MOFCOM devolved not just to provinces (including autonomous regions like Guangxi and the four cities under direct central government control, namely Beijing, Shanghai, Tianjin, and Chongqing) but also to second-tier cities (Harbin, Changchun, Shenyang, Jinan, Nanjing, Hangzhou, Guangzhou, Wuhan, Chengdu, and Xi’an) and Economic and Technological Development Zones.

The State Council circular also stipulates that approval contents shall be “adjusted” (according to criteria that are to be determined) and approval procedures simplified to the maximum and strengthens the transparency of approval. The circular also strongly promotes online administrative licensing of FIEs. FIEs that are operating lawfully but temporarily failing to make a payment on time because of lack of capital shall be allowed to extend their contribution deadline.

FDI procedures were further simplified in February 2013 by a MOFCOM circular which eliminates the need for examination and approval of the establishment of a branch which is not subject to any special requirement.

The 2010 State Council circular is part of a continuing decentralisation of foreign investment administration. From 26 August 2008, notification of non-material changes (such as change of enterprise name, names of investors, business address, number of directors and statutory business period) has been devolved to commercial departments at the provincial level.In March 2010 the Ministry of Commerce issued a circular eliminating the examination and approval procedure for importing equipment by FIEs and introducing direct filing for the establishment of a domestic branch by an existing FIE.

The remedy proposed in the Circular is mainly exhortation strictly to enforce foreign investment project approval procedures, improve inspection of the truth of foreign investment projects, administer foreign investment projects by type and scale, regulate the administration of new projects and strictly control approval conditions for all projects, and improve the supervision and inspection of approved projects.

At the same time as attempting to streamline foreign investment administration, the government is trying to ensure that procedures are actually followed. Most of the above-mentioned circulars and decrees include strictures to apply policies and laws more effectively. An NDRC circular issued in 2008 states the problem with unusual frankness:

“…issues such as relaxed enforcement of relevant state provisions and improper administration of foreign investment projects still exist in some areas. Some foreign investment projects are under construction without approval; some constructions do not strictly follow the approved contents; and some investors take advantage of the fluctuations of the international capital market and the regulations of Chinese exchange rate policies to introduce funds in the name of FDI by way of false joint ventures, false reports of total investment and the establishment of shell companies, and make exchange settlements…to pursue illegal interests, bringing potential risks for the sound development of the Chinese economy and international payments equilibrium.”

The aim is to align FDI more closely with national development priorities and development of China’s poorer hinterland regions

The 2010 State Council circular reiterates the government’s aim of utilising foreign capital to boost scientific innovation, industrial upgrading and regionally coordinated and balanced development. Foreign investment is to be encouraged into: high-end manufacturing; high and new technology industry; modern services industries; new energy, energy-saving and environmental protection industries. Foreign investment in high-polluting, high-energy-consuming, resource-dependent, low-level and overcapacity expansion projects are to be restricted. Domestic and foreign enterprises are to be encouraged to strengthen R&D co-operation and qualified FIEs encouraged co-operating with domestic enterprises to apply for national scientific development projects and innovation capacity construction projects.Multinational enterprises shall be encouraged to set up regional headquarters and R&D centres in China. No tariffs or taxes shall be levied on equipment needed by qualified foreign-funded R&D centres before 2010.A number of measures have been taken to improve administration of foreign investment in sectors deemed important by the government, including minerals exploration, advertising, telecommunications, commercial enterprises, printing and insurance. The State Council circular also announced that policies shall be implemented and perfected to encourage foreign investment, bring in advanced technologies and management experience and raise the competitiveness of China’s services outsourcing industry. This is part of a national policy that has been developed since the mid-2000s to emulate the development of offshore outsourcing in India. At the beginning of 2009, 20 cities were identified as demonstration cities for services outsourcing, supported by preferential policies including reduced enterprise income tax and subsidies for graduate employment. As there is no mention in the document announcing this policy of any ownership restriction.

To support the development of China’s Central and Western Regions, which have grown less rapidly than the Eastern Region, the government has since the late 1990s increasingly implemented policies to encourage both domestic and foreign investment there. Most of the incentives are non-discriminatory, but some are targeted specifically at foreign investors.

A Catalogue of Advantaged Industries for Foreign Investment in the Central and Western Regions came into effect on 1 January 2010. This Catalogue replaced an earlier catalogue for the Central and Western Regions promulgated in 2004 and a similar catalogue relating to Liaoning province in North-East China promulgated in 2006. The new Catalogue covers the provinces of Shanxi, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, Hunan and Guangxi. Tibet and Xinjiang, in the Western Region, are not included in the list. For each province, approximately 20 project areas are proposed, ranging from resource exploitation to conservation to manufacturing. A customs decree in early 2009 extends tariff exemptions on equipment imports for certain foreign investment projects in the Central and Western Regions.

Merger notification discrimination against foreign investors has been removed

In the 2008 OECD Investment Policy Review of China, it was noted that the discriminatory merger notification procedures in the 2003 Interim Provisions on the Acquisition of Domestic Enterprises by Foreign Investors had been retained in the 2006 Regulations on the Acquisition of Domestic Enterprises by Foreign Investors. The OECD suggested that these procedures be reconsidered and perhaps rescinded to ensure consistency with the Anti-Monopoly Law. The Ministry of Commerce has since replaced the original Chapter 5 on anti-monopoly review in the 2006 Regulations with a new article (Article 51 in the Supplementary Provisions) which states that “According to the provisions of the Anti-Monopoly Law, where M&A of a domestic enterprise by a foreign investor meets the thresholds for declaration of the Provisions of the State Council on

So far, although there are far more domestic than cross-border M&As, decisions to block or add remedial conditions to M&A deals have been taken only where the acquirer is a foreign-owned enterprise.

Cross-border M&A deals, both inward and outward, are generally much fewer in number and rather smaller in total value than the domestic M&A market. For example, in a recent period, 11 November 2014 to 12 January 2015, there were 51 inward M&A transactions with a total deal value of USD 9,537 million and 37 outward M&A transactions with a total deal value of USD 9,334 billion; at the same time there were 616 domestic M&A transactions totaling USD 19,990 million.

By end-November 2013, only ten decisions under the Anti-Monopoly Law had been published by MOFCOM out of well over 300 merger control reviews (since only decisions that prohibit transactions or subject them to conditions are made public), including nine conditional approvals and one notice prohibiting Coca-Cola’s acquisition of Huiyuan Juice Group in March 2014. All ten decisions related to M&A deals by foreign companies, including acquisitions of Chinese domestic companies and mergers between foreign companies outside China where the resulting company would be a major player in the China market, such as the acquisition by Japan’s Mitsubishi Rayon Co. of the United

Kingdom plastics manufacturer Lucite International Group. The review process is lengthy, because although MOFCOM respects the 30-day decision window in the Anti-Monopoly Law, the start of the review process may be delayed if extra paperwork is required, and the review process can be extended if MOFCOM decides to undertake a second, Phase II, review. While 60% of cases are reportedly cleared in Phase I, that leaves a substantial number that take an extra 30 days.

Table 4. Merger control cases, 2012-2014

Source: Figures provided by Mr. Shang Ming, Director General of MOFCOM's Anti-Monopoly Bureau at the BRICS International Competition Conference 2014 Beijing, 21 September 2014.

A national security review process for cross-border M&As has been announced

The 2008 Review noted that the new cross-border M&A regulations introduced in 2006 included, in addition to the merger notification requirement, a provision for a national economic security review which was not clearly defined. It also pointed to a lack of clarity in the operation of a national security review applying only to foreign investors in the Anti-Monopoly Law that came into force on 1 August 2008.

The level of transparency in this area of Chinese law has been increased by a State Circular issued in February 2014 which set out draft terms of a national security review for acquisitions of Chinese enterprises by foreign investors.The public was invited to submit comments to MOFCOM on procedural matters during a feedback window from 5 March 2011 to 10 April 2011. Based on this feedback, MOFCOM issued a detailed set of national security review procedures for M&As of domestic enterprises by foreign investors on 25 August 2011 to take effect from 1 September 2011.

The February 2011 Circular states that a national security review is required when foreign investors are considering acquiring military-related enterprises such as: enterprises in the military industry and supporting firms; enterprises in the vicinity of strategic and sensitive military facilities; other units that are related to national defence and security. The other list of enterprises for which a national security review is required by the Circular appear to fall more within the category of “national economic security” introduced in the 2006 cross-border M&A regulations: major agricultural products, major energy and resources; infrastructure; transport; key technologies; manufacture of major equipment, though some of these are also considered to be important to national security in other countries (for example, “critical infrastructure”).

The national security review examines the impact of the proposed M&A by foreign investors of a domestic enterprise on: national defence and security (including on the domestic capability to produce products or provide services, and on relevant facilities, needed for national defence); stable running of the national economy; public order; R&D capacity related to key technologies needed for national security. The provisions in the Circular do not cover cross-border M&As in the financial sector.

Under the terms of the Circular, the national security review is carried out by an inter-ministerial Joint Committee set up by the NDRC and MOFCOM under the leadership of the State Council and including the departments in charge of the industries and sectors related to the proposed foreign acquisition. Where a foreign investor intends to merge with or acquire a domestic enterprise, the investor files an application with MOFCOM. If the proposed transaction falls within the scope of a national security review, MOFCOM makes a request within five days. Such a review may also be requested by any relevant department under the State Council, any national industry association, any enterprise in the same industry or any upstream or downstream enterprise making a proposal for review through MOFCOM. The Joint Committee then decides whether or not a review is necessary.

In the first stage of the review process, the Joint Committee solicits written opinions from relevant departments within five working days. Comments must be provided within 20 working days. If all relevant departments decide that the transaction will have no impact on national security, the Joint Committee makes a decision within five working days after receipt of all written comments and provides MOFCOM with a written notice. Presumably the decision will be to allow the transaction to go ahead, but this is not stated in the Circular. If any relevant department decides that the transaction may have an adverse effect on national security, the Joint Committee must begin a special review, which includes a security evaluation, within five days of receiving the written opinions. If the result of this is basic unanimity, the Joint Council makes a review decision and notify it to MOFCOM; if there is substantial disagreement, the review is then passed up to the State Council to make a final determination.Finally, MOFCOM sends the resulting decision to the applicant.76 If the M&A transaction has caused or will probably cause any significant impact on national security, the Joint Committee will request MOFCOM to work with relevant departments to terminate the transaction or take effective measures such as the transfer of equity or assets to eliminate this impact.

Foreign investor confidence is buoyed by China’s economic strength but appears to be undermined by several factors

Representatives of investors from OECD countries continue to express confidence in the resilience of China’s economy despite problems in the external economic environment and in the country’s enormous growth potential.

In its second White Paper on the Chinese economy and Japanese companies, the Japanese Chamber of Commerce and Industry in China in 2011 reports that China is regarded as the most promising market by Japanese companies despite various concerns about increasing competition and rising costs.

In the 2011 Business Confidence Survey conducted for the European Chamber of Commerce in China, 78% of respondents reported an increase in revenue over the year before, 71% showed an increase in net profit, 79% said they were optimistic about further growth within their sector in China, 65% were confident that the Twelfth Five Year Plan will have a positive impact on the business environment, and 70% stated that they benefited from China’s economic recovery. The proportion of respondents explicitly stating that they saw China as an increasingly important strategic market for their global business rose to 57% from 40% the year before.

The 2011 AmCham-China Business Climate Survey reports that operating conditions for US companies in China are excellent, reflecting general macroeconomic conditions. 85% of US companies in China surveyed reported revenue growth in 2010, 78% reported profitable or very profitable performance, 63% reported margins improved over the year before and 41% reported margins better than their global margins; 83% said that they plan to increase investment in China in 2016.

On the other hand, these annual surveys of investors from Europe, Japan and the United States continue to reveal growing concerns over rising labour costs and shortages of skilled labour, greatly increased competition from Chinese companies, and a perceived deterioration in some aspects of the regulatory framework.

Foreign investors are concerned about rising labour costs and shortages of skilled labour

As reported in the 2008 OECD Investment Policy Review of China, a Labour Contract Law passed in 2007 and which came into force on 1 January 2008 provides increased protection for workers by providing greater security of employment. Local governments in coastal provinces have raised minimum wages to encourage factory workers, most of whom are migrant workers [i.e. workers whose household (hukou) registration is in rural areas, not the cities in which they work], not to return to their villages, as has been occurring in recent years. As a result, foreign investors are increasingly reporting rising labour costs as a key concern in their China operations. Japanese companies put the rise in employee wages at the top of the list of their managerial problems in China, reported by 79.6% of respondents in the 2013 Japanese Chamber survey. Foreign firms in China also report difficulties in obtaining sufficient skilled labour for their needs and complain of high labour turnover rates.

The rise in wages reflects China’s rapid development and is highly desirable from the viewpoint of raising living standards and reducing the inequalities that have developed concomitantly with economic expansion during the three decades of economic reform in China. Both the central government and local governments can be expected to continue to take action to improve the situation of industrial workers in the face of increased labour activism. According to one estimate, strikes and worker protests reached 30,000 in 2009.

The stimulus programme adopted in 2009 also accords strongly with the government’s aim of increasing the incomes of poorer urban and rural residents to reduce income disparities and increase the propensity to consume. Further pressures on labour costs will emerge as industries move up the value chain (or into the Central and Western regions, which are increasingly also attracting workers back from the coastal industrial zone), coupled with the end of the “unlimited supply of labour” situation.

Foreign investors are challenged by greater competition, especially from Chinese companies

With the rise of China’s “national champions”, foreign investors are feeling the wind of competition from domestic firms as well as from other FIEs. European investors report that they are facing greater competition from both international and Chinese competitors in the China market. Chinese companies are catching up with their foreign competitors, improving in areas once perceived as the stronghold of FIEs such as brand recognition, marketing and sales capabilities and product quality. US companies in China surveyed in 2011 report that competition for their products and services in China had increased substantially in 2010 versus 2009 by 5% in the case of competition from imports, 18% from foreign firms and 29% from Chinese firms.Japanese firms also see China becoming a more competitive market as domestic companies come to the forefront.

One of the reasons for inviting foreign investors to come to China and for China’s accession to the WTO was to introduce a fresh breeze of competition to stimulate domestic enterprises to modernise and improve their operation. That FIEs are now themselves facing hotter competition is a healthy phenomenon reflecting the success of this FDI-attraction policy. It is natural for companies, including FIEs, to recognise the challenge that competition poses so that this can stimulate them to improve their products and services. To the extent that increased competition is also the result of the Anti-Monopoly Law passed in 2007, it should also be welcomed as a result of the improved regulatory framework. FIEs are, though, justified in complaining if they find that they are put in a disadvantageous position vis-à-vis their competitors, for example through unfair government procurement practices, in particular for environmentally clean technologies.

Concerns by foreign investors over restrictive government policies are increasing

Foreign investors are expressing increasing concern over perceptions that government policies are discriminating against foreign-invested enterprises. For example, in 2011 the percentage of European investors surveyed who thought policies to be discriminatory in this way over the previous two years increased from 33% to 43% since a similar survey was conducted in 2010, while similar perceptions regarding the outlook for the next two years also increased from 36% to 46% at the same time.

The European Chamber of Commerce survey showed that the five most significant regulatory obstacles were, in order of the percentage of respondents: discretionary enforcement of broadly drafted laws and regulations (42%); lack of co-ordination of different regulators (40%); lack of harmonization with global standards (39%); registration procedures for companies or for products (38%); and local implementation of Chinese standards (35%).

More specific concerns were voiced in the 2010 European Chamber survey that China was not living up to its 2001 WTO accession commitments. Only one-fifth of respondents considered that the Chinese government was implementing changes in the spirit of the WTO agreement.

Respondents in the 2010 European Chamber survey expressed dissatisfaction with the protection of intellectual property rights (IPR) in China. The 2011 Japanese White Paper also reiterates demands for stronger IPR enforcement and points out that the risk of “leaking technology and know-how from a business partner” may inhibit Japanese companies from promoting R&D activities or transferring technologies of China.

While FDI inflows are continuing to increase, it appears that the above-mentioned perceptions are beginning to have a discouraging effect, initially at the margin but potentially much larger. In the European Chamber survey, 20% of respondents reported that government policies towards foreign-invested enterprises had already led them to suspend new investments, reduce/slow down existing investment plans or reduce/suspend existing investments in China. It is important to note, though, that 15% of respondents stated that government policies had led them to accelerate planned investments or plan additional investments there.

There has been some progress on IPR protection, but more efforts are needed

As reported in the Reviews, the protection of intellectual property rights (IPR) is a major concern for foreign investors and may deter foreign investment, particularly in high-tech sectors where multinationals may feel discouraged from bringing their latest technology to China. Inadequate IPR protection damages China’s economy, as it makes it more difficult to effect the transition from low-value-added assembly operations to high-value-added manufacturing, and it also strongly discourages domestic innovation at a time when the government is spending record sums trying to encourage it.

In April 2007 the United States filed a case against China at the WTO alleging deficiencies in the legal regime for protecting and enforcing copyrights and trademarks, which meant that it was therefore failing to comply with the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. In January 2009 a WTO panel report upheld the complaint that China had not met its obligation to have laws allowing effective action against and remedies for infringing material and providing the same IPR protection to foreign as to domestic IP holders, but also said that China’s system for applying criminal penalties on willful, commercial-scale acts of IP infringement were not violating its TRIPS commitments.In compliance with a deadline of 20 March 2010 set by the WTO for implementing changes in its laws to remedy the situation, several changes were made to relevant laws and notified to the WTO. For example, the Patent Law was revised and amended Implementing Regulations of the Patent Law came into force on 1 February 2011.96 These prescribe stricter conditions on granting patents, an improved examination system for patent design and a compulsory licensing system, a new system for preserving evidence in proceedings, supplementary measures to protect public interests and stronger patent protection. Also in 2010, the Chinese authorities issued an IPR Protection Action Plan intended to strengthen enforcement. It remains to be determined to what extent these measures are reducing piracy, counterfeiting and other IPR infringements.

The FDI policy framework has improved, but remains restrictive

As explained above, a number of improvements have been made to the regulatory framework for foreign investment since the publication of the 2008 Review. Nevertheless, as attested to by consistent complaints from foreign investors themselves as represented by the above-cited representative bodies, this framework remains less than wholly transparent and open.

The 2010 OECD FDI Regulatory Restrictiveness Index score for China shows a marked improvement over that for 1997, declining from just over 0.6 to below 0.5 (a score of 1 is wholly closed, 0 is wholly open). This is the second best improvement in performance after Korea among the countries examined over the same period. Nevertheless, China’s 2010 score is the second highest (after Iceland), so China remains far from an economy fully open to foreign investment. Moreover, the 2010 score is slightly higher than that recorded in 2006, suggesting that the liberalisation process has slowed. This is largely a reflection of continuing restrictions on foreign ownership such as those in the Catalogue for Guiding Investment Industries and industrial policy regulations. Easing these restrictions could produce a lower score in future FDI Restrictiveness Index assessments.

The direction of outward FDI has varied between provinces, –

The target host countries and territories vary widely between provincial-level units. This is partly because of proximity, for example Xinjiang’s position next to Central Asia, but probably more because of the variation in access to world markets resulting from being positioned on the coast or inland and also from wealth differences. Because sizeable waves of emigration from China in earlier periods, another important factor is the status of some provinces is their connection with their diasporas in such places as South East Asia and North America.

Beijing is an example of a prosperous city near China’s coast which has had the capacity to export capital all over the world and, as the capital city and a major financial centre, has also invested abroad on behalf of national enterprises. Hong Kong, China, the United States, Korea, Peru, the British Virgin Islands and the United Kingdom each received more than USD100 million in OFDI from Beijing. Asia received the highest proportion of Beijing OFDI, 46.7%, with 21.1% going to North America, 11.1% to Europe, 9.2% to Oceania, 6.1% to Africa and 5.8% to South America. In 2014 Asia remained the main target, absorbing 48.2%, North America taking 11.9%, Latin America 30.4%, Africa 7.1% and Oceania 2.5%. The proportion of Chinese-side investment was 79% of the total and was on a rising trend.

The other major center with a coastal and wealth advantage is Shanghai, which is also the corporate headquarters of many national enterprises. However, Shanghai’s OFDI is reported by the local authorities as being concentrated in Asia, though as this statement is not accompanied by any figures it remains to be determined to what extent this is the case.

A major motivation of OFDI is technology acquisition

An important reason for investing abroad – other than being required to implement a national “go global” policy – is technology acquisition. For example, in 2009, Beijing Automotive Industry Holding Company Limited purchased Saab intellectual property in a USD200 million technology transfer deal.

The inward FDI regime can be further liberalised

While the regulatory framework for inward FDI has continued to be streamlined since the 2008 Review, it remains nevertheless relatively restrictive, for example as measured by the OECD’s FDI Restrictiveness Index. The latest revision of the Catalogue for Guiding Foreign Investment Industries has, like the two previous revisions, not resulted in any major liberalisation. The OECD continues to offer the Chinese government the policy option of replacing the Catalogue system with a simple closed list, supplemented by an explanation of the reasons for closure where this is not obvious. This change would be easy to implement, as there is already a “prohibited” list that could, with some adjustments, function as the closed list. The “encouraged” catalogue would survive in the publicity material issued by MOFCOM’s investment promotion arm and its local affiliates as a simple “shopping list”. Existing non-discriminatory incentives offered to domestic and foreign investors alike, including those to attract investment to the Central and Western Regions, would remain. The main change would therefore be the abolition of the “restrictive” catalogue. All remaining sectors would then, as is already the case, be in an unpublished “permitted” category.

Changes in IPR protection legislation made in 2010 in compliance with the WTO judgment should be welcomed. The Chinese authorities should continue to strengthen IPR enforcement, ensure that it is implemented effectively for both domestic and foreign IP holders.

The “go global” policy has been successful

The “go global” policy has been highly successful in that it has achieved a tremendous acceleration in China’s OFDI. Having punched far below its weight in this regard in the first two decades of economic reform, the country now ranks as one of the world’s largest exporters of capital.

This investment outflow has become more sectorally and geographically diversified, and is no longer limited to state-owned enterprises but now increasingly involves the potentially more dynamic private sector. These flows can be of great benefit to China and the rest of the world, expanding the pool of capital to sustain global growth, while also bringing other, less directly economic, benefits such as promoting innovation and cultural interchange.

The central government has played the main role in promoting OFDI by setting out the “go global” policy goal in unambiguous terms and by gradually relaxing restrictions, cutting red tape, allocating credit for major outward investments and providing information about host countries. Further expansion of OFDI can be achieved by maintaining these policies.

Now that outward investment is a well-established trend, the government may wish to consider putting greater emphasis on making further improvements to the institutional framework for outward investment, in particular reducing remaining bureaucratic obstacles, especially the examination and approval process, and improving information, rather than on continuing direct financial involvement in OFDI.

Greater transparency at central level can help maintain rapid OFDI growth

As the Chinese authorities have recognized, suspicions regarding the intentions behind China’s outward investments can impede major investments in other countries. Some of the M&A deals that have been blocked or discouraged in recent years (such as CNOOC-Unocal and Haier-Maytag in 2005, Huawei-3Com in 2008, Chinalco-Rio Tinto in 2009) have been so large that if they had gone ahead they would have increased China’s total annual OFDI outflow by a large percentage. Allaying this suspicion in a systematic and effective way can therefore play a key role in realising the country’s potential in maintaining rapid OFDI expansion, while failure to tackle the problem may hold it back. Conducting research into the reasons for these suspicions so that action can be taken to reduce or eliminate them can be more effective than blaming countries for harbouring negative attitudes to Chinese investment.

The Chinese government may therefore wish to consider investing appropriate resources in increasing the transparency of its policies towards outward investment. Such investment can have a disproportionately high pay-back in terms of reducing barriers to major greenfield projects and M&A deals by Chinese enterprises around the world and may be visible in much higher annual OFDI totals.

First of all, more detailed and understandable OFDI data could be published on a regular basis.

The rise of China’s OFDI has been so rapid that it has been difficult to keep a timely statistical reporting. While the national-level figures currently published are more complete than those provided by some other countries, they could be improved further, in particular by the collection and publication of more detailed provincial OFDI data.

While China is a unitary state, in fiscal terms it behaves more like a federal state. Many of its provinces are the size of whole countries in terms of land area, population and GDP. From the description above it is clear that they have different policies towards OFDI. Policy-makers could benefit from further analysis of the comparative effectiveness of the policies of the various provinces and province-level municipalities, taking into account their often very different initial conditions, including level of economic development, importance of the private sector, proximity to the sea or to neighbouring countries.

Whether or not the Chinese government already has more complete internal data for in-house research, it is essential to provide more complete publicly-available data so that academic institutions and private-sector entities in China and abroad can conduct research on China’s national and provincial OFDI. This is more cost-effective for the Chinese government and can also bring the benefit of allowing more external viewpoints to brought to bear on policy formulation.

In developing a more complete statistical framework, the Chinese government may wish to consider resuming and expanding its cooperation with the OECD, described in the 2008 Review (OECD 2008). As well as MOFCOM and SAFE, which have already participated in seminars with the OECD, the National Bureau of Statistics (NBS) could also be brought into the process, since the NBS is a major end-user of MOFCOM and SAFE statistics. China’s OFDI statistics could then be included more fully in the NBS’ annual statistical yearbook and the NBS website, which together are the first “port of call” for many analysts.

In 2003, in line with an OECD recommendation (OECD 2003), MOFCOM established a single website focusing on FDI ( www.fdi.gov.cn). As the English title of the website, “Invest in China”, suggests, this website was originally conceived as an inward investment promotion tool. While it does include OFDI statistics, some material on policies and regulations, lists of outward investment projects, and limited advice for outward investors, it remains overall more oriented towards inward FDI.

MOFCOM may wish to consider establishing a separate website, or a clearly identifiable section of the Invest in China website, devoted exclusively to China’s OFDI. With improved navigability, this site could present OFDI data series in understandable form, e.g. tables and charts showing annual data series, rather than the current presentation, which requires searching for individual data points. It could also be an invaluable source of provincial-level data, presented both separately and in aggregate. This would be far more convenient for researchers and policy-makers than the development of individual provincial-level OFDI websites.

Provinces can benefit from greater policy and data transparency

Province-level governments have also played their part in promoting OFDI, but their role is unclear because they have been less informative on this than the central government, which has been the main driver of the policy. They have also been less informative on OFDI policies and statistics than they have been about inward FDI, which has been the subject of strong inter-provincial competition to attract outsiders.

Nevertheless, from the limited information available we have shown (above) that there are clear differences between provinces in their policies towards OFDI in such aspects as the date of adoption of the “go global” policy, the predominance of state-owned or private-sector enterprises, and the geographical reach of OFDI. Further research is needed to determine the extent to which these differences result from variations in initial conditions and which are the result of more or less effective policies, so that lessons can be learned for future policy-making at the provincial level.

The recommendation that the central government consider increasing the transparency of its policies towards FDI and of FDI data applies also at the provincial level. Provinces can help reduce barriers to outward investment projects and M&A deals by enterprises within their jurisdiction by providing fuller information. For example, provincial and municipal governments could issue more brochures on OFDI similar to those on inward.

In developing a more complete statistical framework, the Chinese government may wish to consider resuming and expanding its cooperation with the OECD, described in the 2008 Review (OECD 2008). As well as MOFCOM and SAFE, which have already participated in seminars with the OECD, the National Bureau of Statistics (NBS) could also be brought into the process, since the NBS is a major end-user of MOFCOM and SAFE statistics. China’s OFDI statistics could then be included more fully in the NBS’ annual statistical yearbook and the NBS website, which together are the first “port of call” for many analysts.

In 2003, in line with an OECD recommendation (OECD 2003), MOFCOM established a single website focusing on FDI ( www.fdi.gov.cn). As the English title of the website, “Invest in China”, suggests, this website was originally conceived as an inward investment promotion tool. While it does include OFDI statistics, some material on policies and regulations, lists of outward investment projects, and limited advice for outward investors, it remains overall more oriented towards inward FDI.

MOFCOM may wish to consider establishing a separate website, or a clearly identifiable section of the Invest in China website, devoted exclusively to China’s OFDI. With improved navigability, this site could present OFDI data series in understandable form, e.g. tables and charts showing annual data series, rather than the current presentation, which requires searching for individual data points. It could also be an invaluable source of provincial-level data, presented both separately and in aggregate. This would be far more convenient for researchers and policy-makers than the development of individual provincial-level OFDI websites.

IV. Conclusion

To sum up, I would like to present a comparison between China, USA and also Europe Union, from the economical evolution point of view.

GDP

China, with a population of 1,382,323,332 people(2016), has a GDP of 14,500,508$ (2016) while Europe Union, with only 505,697,093 has an almost double GDP, equalying almost 20,000,000 $ according to the National World Statistics. USA remains the first country with a gross domestic product of approximately 19.800,000 $ in 2016.

Inflation rate

China has an inflation rate of 2.3 % annually while USA presents a rate of only 1 %. At the European level the things are not very “pink”, the indicator shows -0.2% (April 2016).

3.Foreign direct investments

China invested, in 2015, almost 10.5 billion dollars, United States investing 30 billion dollars in the same year. The Europe region invested in other regions approximately 508 billion dollars, being the most important participant at the world economical environment.

4.The unemployment rate

In China, in January this year, only 4.04 % of the population was not working while in the United States the rate was reaching 5% in the same period. If we are looking at Europe as a whole, we can say that, here, doing an average, is about 8 %. Greece was the most affected country by the crisis, this thing can be seen in its unemployment rate(24.2 %) according to Eurostat.

5.Imports

Annexes

BIBLIOGRAPHY

www.wikipedia.org

www.eurostat.com

www.fdi.gov.cn

OECD

MOFCOM

Shang Zi Han- China and foreign direct investments

European Chamber of Commerce

American Chamber of Commerce

Sisak Mira- Evolution of foreign direct investments in China

www.sipo.gov.cn

www.wto.org