Transcript Australia-China Free Trade Agreement Conference

Foreign Investment
The rise in FDI into China
Myths and realities
Alex Erskine, Erskinomics Consulting Pty Limited
[email protected]
13 August 2004, Sydney
Australia-China Free Trade Agreement Conference
Erskinomics
Myth-building: the official story
Inflows and stock of FDI in China
60
50
50
40
40
30
30
20
20
10
10
0
0
"Official" FDI into
China - LHS
% of GDP
US$ billion
60
Stock of "official"
FDI as % of GDP at
market exchange
rates - RHS
1982 1985 1988 1991 1994 1997 2000 2003
Source: Erskinomics
Australia-China Free Trade Agreement Conference
Erskinomics
Myth-building: the official story
60
60
50
50
40
40
30
30
20
20
10
10
0
0
"Official" FDI into
China - LHS
% of GDP
US$ billion
Inflows and stock of FDI in China
Stock of "official"
FDI as % of GDP at
market exchange
rates - RHS
Average stock for
developing
countries as % of
GDP
1982 1985 1988 1991 1994 1997 2000 2003
Source: Erskinomics
Australia-China Free Trade Agreement Conference
Erskinomics
Myth-building: the official story
60
60
50
50
40
40
30
30
20
20
10
10
0
0
"Official" FDI into
China - LHS
% of GDP
US$ billion
Inflows and stock of FDI in China
Stock of "official"
FDI as % of GDP at
market exchange
rates - RHS
Average stock for
developing
countries as % of
GDP
Average stock for
developed
countries as % of
GDP
1982 1985 1988 1991 1994 1997 2000 2003
Source: Erskinomics
Australia-China Free Trade Agreement Conference
Erskinomics
The extent of overstatement so far
• No firm data: intrinsic secrecy in “round-tripping”
• Outward leg: Capital created in China, intermediated through HK or other
financial centres to escape regulations and to gain value-added services
• Outward leg: “capital flight” achieved through over-invoicing for imports
and under-invoicing for exports, smuggling, or investing in HK “Red Chip”
IPOs of PRC companies
• About ¼ of flight capital later returns (“round-trips”) as FDI when
opportunities emerge
• Other errors, e.g., wrongly counting PRC-based investment in FIEs as
FDI
Source: ADBI Discussion Paper No 7 by Geng Xiao June 2004
Australia-China Free Trade Agreement Conference
Erskinomics
Deflating the “great sucking sound”
Xiao's estimates of FDI overstatement, 1994 - 2001
US$ billion, 1994-2001
350
300
250
86
179
132
200
"Round-tripping"
150
246
100
153
"Genuine" FDI
199
50
0
High estimate
Middle
estimate
Low estimate
Source: ADBI Discussion Paper No 7 by Geng Xiao June 2004
Australia-China Free Trade Agreement Conference
Erskinomics
Replacing myths with realities: the greater future
60
60
50
50
40
40
30
30
20
20
10
10
0
0
1982 1985 1988 1991 1994 1997 2000 2003
"Official" FDI into
China - LHS
% of GDP
US$ billion
Inflows and stock of FDI in China
Stock of "official"
FDI as % of GDP at
market exchange
rates - RHS
Stock of "official"
FDI as % of GDP at
PPP exchange
rates - RHS
Source: Erskinomics
Australia-China Free Trade Agreement Conference
Erskinomics
CalPERS, a key US pension fund manager, is restricting its
overseas investment allocations to qualified markets
Criteria
OK
50% market quality
Developed markets inc
Market regulation, legal Japan, Hong Kong and
Singapore
system, investor
protection; settlement
times, transaction
costs; capital market
openness; liquidity; and
volatility
50% country quality
Political stability;
transparency; and
labour practices
Emerging markets inc
Korea and Taiwan
NOT OK
China
India
Indonesia
Malaysia
Philippines*
Sri Lanka
Thailand
*Philippines appealed
(successfully) to
CalPERS in 2002 and
has appealed again in
2003
Source: Asia Times 2003
Australia-China Free Trade Agreement Conference
Erskinomics
Drivers of less “round-tripping”and more “genuine” FDI
Drivers of reduced “capital flight”
• Expectations have turned around to favour RMB appreciation
• Improved protection of domestic investors ahead
Drivers of reduced “round-tripping” FDI
• Unitary tax, reduced concessions & differential protection for FIEs
Drivers of increased “genuine” FDI
• Rule of law, development of finance sector and capital markets
• Expansion of developing country and developed country MMCs
• Start of convergence between China’s PPP and market exchange
rate
Australia-China Free Trade Agreement Conference
Erskinomics
Always read the fine print!
Copyright 2004. Erskinomics Consulting Pty Limited.
All rights reserved. Please cite Erskinomics as the source.
Disclaimer. Under no circumstances is this to be considered as an offer
to sell or solicitation to buy any investment. Erskinomics Consulting Pty
Limited does not guarantee its accuracy or completeness and disclaims
any responsibility for loss or damage suffered by any person relying,
directly or indirectly, on this presentation, including in relation to
negligence or any other default. Opinions and estimates constitute
judgments, which change as circumstances change, if not before.
Alex Erskine, Managing Director
Erskinomics Consulting Pty Limited ACN 089 131 242
PO Box 219 Neutral Bay NSW 2089
Mobile 0411 243 860
Fax 02 9908 1589
E-mail [email protected]
Australia-China Free Trade Agreement Conference
Erskinomics