Yakubova
D.R. Financial University under the government of the Russian Federation
Supervisor:
ass.prof.of “IE&IER” Silantieva E.A.
The reasons for capital
imports and exports (for example in China).
The article is devoted to the analysis of the capital flows, imports and
exports. The country chosen for the analysis is People’s Republic of China.
The significance of the article is composed on the qualitative
assessment of the capital flows in and outside China, main goals of import and
export, future perspectives of investing in China and analyzing the current
position of the People’s Republic of China in the international economic
relations.
Key words: foreign investment (èíîñòðàííûå êàïèòàëîâëîæåíèÿ), FDI (ïðÿìûå
èíîñòðàííûå
êàïèòàëîâëîæåíèÿ), ODI (îòòîê
ïðÿìûõ
èíâåñòèöèé), hot money (ñïåêóëÿòèâíûå, ðèñêîâàííûå
äåíüãè), China
For everybody interested in the development of international economy it
is not a secret, that nowadays Chinese economy gains momentum in the world’s
trade. China is now the world’s third largest external creditor, although much
of its wealth is held in the form of foreign reserves, as opposed to foreign
direct investment like the other large international investors (namely Japan and
Germany). Thus, it is obvious that this work collects the analyzes of two types
of capital flows: inflows and outflows. Firstly, we will examine capital inflow
in China, as the People’s Republic of China nowadays is seen as a perspective
country for future investments, most world economies are interested in the
discussion of the features of capital imports in this country.
China’s FDI (Flow direct investment): capital import and its features.
China quickly recovered from the global financial crisis in 2007. In
2010 China’s GDP grew 10.3 percent, current account surplus and foreign
exchange reserve reached $305.4 billion and $2.847 billion respectively, and
FDI reached $105.74 million, increased 17.4 percent from 2009. According to the
reports of United Nations Conference on Trade and Development, China rose to
second place by the level of FDI after the USA in 2009, entering the top 20
investors of the world. The growth trend continued in 2011, according to the
Figure 1. In the first half of 2012, developing and transition economies
continued to absorb more than half of global FDI flows. For the first time,
developing economies alone accounted for a half of the global total. Despite a
slight decline in FDI inflows, China became the largest recipient country in
the first half of 2012, followed by the United States.[10]
Figure 1. Global FDI inflows: top
10 host economies, 2011:H1–2012:H1
(Billions of US dollars)
Let us apply to the researches
of the Chinese people themselves and to their estimation of the happening
economic growth of their country and increasing significance on the world
market of capital. While doing my investigation, I have seeked to some
statistical work of Logan Wright (a Beijing-based analyst at Stone &
McCarthy, an economic-research firm). The problem reported in his discussion is
that in most official sources reserves exclude the transfer of foreign capital
from the People’s Bank of China to the China Investment corporation, the
country’ sovereign-wealth fund, which seeks to control capital imports and
exports in the country. [6] This corporation is thought to engage in
building influence for the government by buying up significant stakes in
companies that have influence in western governments and in the target firms
that have heavily invested in China. This organization helps the government to
influence the policies of multinational companies and to protect China’s
interests in international spheres. This fact inclines to the opinion, that to
invest money in China seems not as easy and possible, as it could be; it also
indicates about the reason not to import capital in the People’s Republic of
China. But won’t be so thoughtless. Some economists use this as a possibility
for hot money inflows, which already takes place in China. The term “hot money”
is commonly used to refer to the “flow of funds (or capital) from one country
to another in order to earn a short-term profit on interest rate differences
and/or anticipated exchange rate shifts”.
Analysts point the two key
reasons for such inflows:
1.
The relative interest rate in China and the United States;
2.
Expectations for the future appreciation in the value of China’s
currency, the renminbi (RMB). [2]
Over the last years, they are 2010 and 2011 years, the interest rates in
China and the United States have been moving in the opposite direction: while
in the USA the rates were lowered, the People’s Republic of China raised its
interest rates at the same time. The reversal in the interest rates of two nations
has created an incentive for investors to move their deposits from the U.S. to
China in order to earn a higher rate in return. In
addition to the attraction of the interest rate difference, speculators are
moving “hot money” into China because of the general expectation that the RMB
will continue appreciate in value against the U.S. dollar and other
currencies. Li Yang, a financial
researcher at China’s Academy for Social Sciences, in 2008 calculated that “hot
money” speculators can obtain profit rates of over 10% per year with little
investment risk. However, the big Western Funds find it hard to move money into
China. Trade and investment offers as big loophole for Chinese and foreign
firms, as individuals can use the 50,000$ annual limit for bringing money into
China from abroad. Today it is obvious that China needs to reduce the incentive
for shattering capital inflows, rather than block the channels…
The reasons for developing
of FDI and ODI cannot be examined separately, as they both while interacting
composes the picture of investment climate in the China. Thus, another part of
this research work is devoted to the Chinese ODI and its features.
China’s ODI (Outflow direct investment): capital export and its
features.
Compared to inflows, China’s outflow direct investment (ODI) is quite
small. However, the past of the ODI development in China has been quiet
positive, and its indicators increase from year to year. In sum, since China opened up in 1978, the ODI policy has evolved
together with other economic reform policies. Specifically, the ODI strategy
has been transformed from a purely political devise to a more market-oriented
operation. [1] In terms of the group of players, it has expanded
from mainly state-owned enterprises to a mix of state-owned and commercial
entities. Nevertheless, there is still a heavy state involvement in ODI
activity; at least, this is what is perceived by the rest of the world. Thus,
the absolute magnitude of China’s ODI is quite small compared with other
sources of FDI.
The main question of my issue in the terms of exports
is: Why does China invest abroad? What are the motives?
According to the Ministry of Commerce of the PRC, in
first half of 2012, Chinese investors made direct investment in 2,163 overseas
enterprises in 116 countries and regions. Total non-financial direct investment
overseas amounted to USD 35.42 billion, up by 48.2% year-on-year. The turnover of China's overseas contracted projects
reached US$ 50.35 billion in first half of 2012, up by 18.4% year-on-year; and
the value of newly-signed contracts was US$ 66.76 billion, up by 0.9%
year-on-year. However, let us first switch to the history of development of
outward direct investments in China and examine it in details.
Figure 2. The distribution of China’s overseas direct
investment among developing and developed countries
Source: Almanac of China’s Foreign Economic Relations and Trade, various
issues
One interesting feature of China’s outward investments is the
concentration on developing countries. Let us look at Figure 2 and consider the
distribution of China’s overseas investments. Through yeas the wave of
investments changed its direction from developed countries to developing. This
tendency causes reflections about the reason for replacement of priorities, and
makes sure the belief that China is intensifying its economic investment in
developing countries. To find the reason for such replacement I have analyzed a
report of Y.W.Cheung and X.Qian “Empirics of China’s outward direct
investment”, in which countries, which had long-term investment relations with
China from 1993 to 2008, were analyzed. The separate examination of developed
and developing countries, to which China continues the distribution of direct
investment, takes place in the report because of the difference in the
indicators in the countries.
The empirical findings confirm that China displays
different types of investment behavior across developed and developing
countries. Subject to the differences between developed and developing
countries, the results suggest 4 types of the development of the Chinese ODI:
1)
the presence of
market-seeking and resource-seeking motives;
2) that Chinese exports to developing countries tend to
induce China’s ODI;
3) that the recent surge in the Chinese holding of
foreign exchange reserves promotes its ODI in developed countries;
4) that Chinese capital displays different types of
agglomeration behavior across developed and developing countries.
Figure 3. Chinese
Investment in Pictures
Closer to nowadays the situation with the
geographical distribution of China’s overseas investments has changed, however,
in general, it stayed the same, and the main change is that the priority
countries are now opened economies, such as Australia and U.S. For more
detailed overview let us examine Figure 3. The Heritage dataset clarified the
geographic areas of concern. Approximately 40 percent of PRC investment from 2005-2009
was in OECD (Organization for Economic Co-operation and Development) countries.
Sub-Saharan Africa and West Asia (including Iran) attracted another 35 percent,
combined. East Asia, Latin America, and the Arab world lagged in attracting
Chinese investment. Over the last five years 2005-2010, the U.S. has been the second-largest destination of non-bond
investment, at $21.2 billion total.
It is
illuminating, as well as unsurprising, that the largest destination for Chinese
non-bond investment is also an open economy - Australia. Another such economy -
Britain - is the fifth-largest destination. A second set of target countries
has received a good deal of attention: resource-rich economies with closed or
otherwise troubled political systems. For energy, the Heritage dataset confirms
that Iran is the leading example; in metals, it is the Democratic
Republic of the Congo (DRC). The DRC exemplifies China's willingness, when
particular assets are in play, to do business with little regard for local
conditions or global sentiment. The other countries, which are not included in
the top 5 countries, in which China invests, are also the same, and Iran and
DRC are – I mean, they are rich of resources, which China is poor in. this fact
makes obvious the opinion, that the investments of People’s Republic of China
abroad is access to resources, especially those China lacks.
Taking everything into account, it is obvious that
nowadays China is actively promoting its investment activity abroad. In
addition to the ‘going global’ policy, China is posed to increase its portfolio
investment capacity in overseas markets. The conclusion of my research work is
the view in the future development of investment climate in China: hoping that
the government of PRC would lower control of capital flows in the country,
leading to lowering the levels of hot money inflows, which damage the rapidly
growing economy, makes me be more sure, that China is the world leader in
economy for future decades. For sure, more attention is paid to the capital inflow
as the world economy develops rapidly and “needs” such country, as China – in
investing sphere and not only, that is why for the rest of the world the
development and improvement of circumstances for less complicated process of
capital inflow in China. The other point, which stays important for the economy
of PRC, is outflow direct investment. This sphere today is only gaining
momentum, however, the policy of capital outflow is already based on the
principle, which became clear to us – resources, and consequently the only need
is to increase the quality and quantity of capital outflow to the rest of the
world and concentrate more on those countries, which are efficient to invest
in.
References:
1.
B.Dong, G.Guo, “A model
of China’s export strengthening outward FDI”, 2012, p.1-4
2.
M.F.Martin,
W.M.Morrison, “China’s “Hot Money” Problems”,
2008, p. 1-4
3.
Can Huang, Mingqian
Zhang, Yanyun Zhao and Celeste Amorim Varum, “Determinants of exports in China:
a microeconomic analysis”, 2008
4.
Y.W.Cheung, X.Qian, “Empirics of China’s outward direct investment”,
2009
5.
Global investments trend monitor
(UNCTAD) ¹7, 2011
6.
“The economist”
journal, “Hot and bothered”, 2008
7. M.J. Herrerias, Vicente Orts,
“Imports and growth in China”, 2011
8. Kuang-Hann Chou, Chien-Hsun Chen, Chao-Cheng Mai, “The impact of
third-country effects and economic integration on China’s outward FDI”, 2011
9. Priscilla Liang,
“Uniqueness of speculative capital flows and monetary policy responses in China
(2007-2010)”, p. 1-6
10. Global
investments trend monitor (UNCTAD) ¹10, 2012
11. Derek Scissors, Ph.D., “Chinese Outward Investment:
Better Information Required”, 2010
12. Electronic source “Ministry of Commerce of the
people’s Republic of China”, HTTP: http://english.mofcom.gov.cn/statistic/statistic.html, date of view: 16.11.2012