FDI Policies in China

Lin GuijunUniversity of International Business and Economics

Why FDI for China

With the inception of economic reform in 1979, China began to attract FDI.

Before the reform the inflow was zero.

To overcome the shortage of domestic funds for economic reconstruction;

(1) To introduce foreign managerial and technological know-how;

(2) In view of the success of the Asian Tigers, the policy was to help enhance China’s export capacity.

(3) To fill in the gap in productive capacity

What measures to promote FDI inflows

1. Establishing Special Economic Zones In 1979, the Chinese government

decided to establish special economics zones.

The special economic zones are export oriented.

The four SEZs include: Shenzhen. Zhuhai (both near Hong Kong), Shantou (with close connections with Chinese diaspora), Xiamen (near Taiwan).

Also in 1979, incentives (mainly favorable taxes) were allowed to develop processing exports.

2. Open Coastal Cities

In 1984 the Chinese government opened 14 coastal cities.

At the end of the year, Changjiang delta, Zhujiang delta, Liaodong Penisular and Shandong Penisular were open to foreign investment.

In 1988, Hainan, part of Guangdong was designated as special economic zone.

In 1990, Pudong development zone was established.

3. Open Inland Cities

In 1993, 28 interior cities and 14 inland border cities were open to FDI inflow.

4 Reform for Socialist Market Economies In the Spring of 1992, Deng

Xiaoping reassured the goal of the reform to establish socialist market economy

In 1993 China became the second largest FDI recipient country.

It is now the largest recipient.

Exports Export Imports

Market SITC Product of Parts and Components (US$ mn) Share (%) SITC Product of Parts and Components ($ million)East Asia (9) 776 Parts of electronic components 36,049 27.5 776 Parts of electronic components 125,967

764 Parts of telecommunication equipment 29,581 22.6 764 Parts of telecommunication equipment 23,246 65 Textile yarn, fabrics & made-up materials 16,784 12.8 759 Parts of office and adding machinery 16,085 759 Parts of office and adding machinery 13,588 10.4 772 Parts of switchgear 15,272 772 Parts of switchgear 8,675 6.6 65 Textile yarn, fabrics & made-up materials 8,486 784 Parts & motor vehicles and accessories 3,817 2.9 784 Parts & motor vehicles and accessories 7,047 691 Parts of structure in iron and steel 2,584 2.0 88411 Parts of unmounted optical elements 5,008 7239 Parts of construction machinery 1,562 1.2 7239 Parts of construction machinery 1,847 88411 Parts of unmounted optical elements 1,017 0.8 7133 Internal combustion engines for marine 1,610 82122 Mattress supports and cushion for furniture 1,011 0.8 7139 Parts of internal combustion engines 1,465

All above parts & components (10 items) 114,667 87.6 All above parts & components (10 items) 206,031 Total parts & components Exports (75 items) 130,923 100.0 Total parts & components Imports (75 items) 220,587

As % of all goods 32.0 As % of all goods0 to 9 All goods exports 409,766 0 to 9 All goods imports 569,516

EU (27) 764 Parts of telecommunication equipment 31,118 33.1 776 Parts of electronic components 7,888 776 Parts of electronic components 14,895 15.8 772 Parts of switchgear 5,853 759 Parts of office and adding machinery 11,697 12.4 784 Parts & motor vehicles and accessories 4,282 65 Textile yarn, fabrics & made-up materials 9,464 10.1 764 Parts of telecommunication equipment 3,938 772 Parts of switchgear 4,611 4.9 65 Textile yarn, fabrics & made-up materials 2,364 784 Parts & motor vehicles and accessories 3,119 3.3 7149 Parts of other engines and motors 1,736

81242 Parts of lighting fittings and base metals 2,936 3.1 759 Parts of office and adding machinery 1,038 691 Parts of structure in iron and steel 1,691 1.8 8749 Parts of instruments and accessories 1,007 625 Rubber tyres for wheels 1,559 1.7 7139 Parts of internal combustion engines 978

78539 Parts of carriages and cycles 1,440 1.5 7132 Internal combustion engines for vehivles 937 All above parts & components (10 items) 82,530 87.7 All above parts & components (10 items) 30,020

Total parts & components Exports (75 items) 94,089 100.0 Total parts & components Imports (75 items) 41,111 As % of all goods 25.4 As % of all goods

0 to 9 All goods exports 370,782 0 to 9 All goods imports 181,586

NAFTA (3) 764 Parts of telecommunication equipment 29,445 32.3 776 Parts of electronic components 16,844 759 Parts of office and adding machinery 10,607 11.6 764 Parts of telecommunication equipment 3,486 65 Textile yarn, fabrics & made-up materials 9,286 10.2 759 Parts of office and adding machinery 2,508 784 Parts & motor vehicles and accessories 6,172 6.8 772 Parts of switchgear 2,098 776 Parts of electronic components 4,915 5.4 7149 Parts of other engines and motors 1,110 772 Parts of switchgear 4,475 4.9 65 Textile yarn, fabrics & made-up materials 945 7239 Parts of construction machinery 3,789 4.2 7929 Parts of aircraft 922 625 Rubber tyres for wheels 3,230 3.5 8749 Parts of instruments and accessories 813

81242 Parts of lighting fittings and base metals 2,718 3.0 784 Parts & motor vehicles and accessories 659 82122 Mattress supports and cushion for furniture 1,892 2.1 72849 Parts of machines for other special industry 607

All above parts & components (10 items) 76,528 83.9 All above parts & components (10 items) 29,992 Total parts & components Exports (75 items) 91,221 100.0 Total parts & components Imports (75 items) 34,135

As % of all goods 24.5 As % of all goods

The Major Products of Parts and Components in Greater China's Trade with East Asia, European Union and NAFTA Markets, 2008

5. Enacting Laws

In 1979, “The Joint Venture law of the People’s Republic of China” was adopted.

1986, the Law on Foreign Investment was enacted.

In 1988, the “Law on Foreign Co-production” was enacted.

6 government’ s participation Governments at various level

played high importance on FDI inflow.

Local governments compete with each other.

Financially Does China Need FDI?

How much FDI in China

Total inflow of FDI into China is around 800 billion dollars, creating about 30 million jobs.

Inflow and Outflow of Direct Investment

Savings and Investment Aggregate

95 98 00 01 02 03 04 05 06

储蓄 41%

39% 37% 38%

40% 44% 47% 50% 52%

投资 41%

36% 35% 36%

38% 41% 43% 43% 43%

经常项目

0% 3% 2% 1% 2% 3% 4% 7% 9%

Saving and Investment Sectoral

95 98 00 01 02 03 04 05 06

政府部门储蓄 1% 0% 0% 1% 1% 2% 1% 2% 2%

投资 4% 5% 5% 5% 5% 5% 5% 5% 5%

生产部门储蓄 33

%29%

25% 23% 23% 23% 26% 36% 38%

投资 27%

23%

22% 24% 24% 27% 29% 29% 30%

个人部门储蓄 8% 9% 12% 14% 12% 19% 19% 11% 11

%

投资 5% 5% 5% 5% 6% 6% 6 6% 6%

Saving and Investment Production

95 98 00 01 02 03 04 05 06

国有企业储蓄 18

%17% 11% 10% 8% 8% 9% 12

%12%

投资 16%

14% 12% 12% 11% 10% 10% 10%

10%

集体企业储蓄 8% 5% 3% 2% 1% 1% 1% 2% 1%

投资 6% 5% 5% 5% 5% 6% 7% 7% 7%

公司制企业储蓄 7% 7% 11% 12% 12% 13% 16% 23

%24%

投资 1% 2% 3% 5% 6% 8% 10% 10%

10%

外资 3% 2% 2% 2% 2% 3% 4% 4% 4%

FDI as a share of total domestic investment

0%

2%

4%

6%

8%

10%

12%

14%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Date

% o

f T

ota

l In

vest

men

t

FDI as a Share of TotalInvestment

Share of foreign ventures in trade

0

10

20

30

40

50

60

70进出口总额比重

出口总额比重

进口总额比重

Share of domestic firms in trade

0102030405060708090

100进出口总额比重

出口总额比重

进口总额比重

Processing exports and total exports

1979 2007（ － ）

02000400060008000

100001200014000

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

亿美元

出口总额 加工贸易出口额

Investment policies with WTO

Conforming investment guidelines and their implementation to WTO rules.

Complying fully with the WTO’s Agreement on Trade-Related Investment Measures upon accession.

Eliminating policies requiring trade and foreign exchange balancing, local content, and export performance.

Ensuring that investment approval is not conditioned on whether competing domestic suppliers of such products exist or performance requirements of any kind, including the transfer of technology and the conducting of research and development in China.

Amending industrial policies for the automotive sector to ensure gradual liberalization on types or models of vehicles permitted for production over 2 years and investment levels approvable by provincial governments over 4 years, and removing the 50 percent foreign equity share limit on automotive engine plants upon accession.

Further liberalization of some sectors already opened before, such as Automobile industry: moving local holding majority share to 50/50.

Opening new sectors for FDI, especially in service sector, such as Banking, insurance, distribution and so on.

FDI Laws revision

FDI Laws revision

In July 1979, the government enacted “The Joint Venture law of the People’s Republic of China” adopted in 1979.

It was revised in 1990 and 2001.

Joint venture law revision

Before revision After revision

No. 2, Article 2: activities must obey China’s law, decree and relevant regulations

Activities must obey China’s laws and legal regulations

Hiring and laying-off governed by the agreement and contract of joint venture partners

Hiring, laying-off, salary, welfare and protection and security must be stipulated in a contract.

(new article added) must establish trade union to protect workers

Joint venture law revision

Before revision After revisionNo. 2 Article 9: various insurance covered by China’s insurance companies

Covered by insurance companies within China

Production plan must inform government agency

deleted

Domestic suppliers have priority for required raw materials fuel and parts, or using own FX to acquire in international market

According to the market principle, can be acquired from either domestic or foreign suppliers

Joint venture law revision

Before revision After revisionIn No. 15, Article 14: disputes among investors settled through domestic arbitration or other arbitration bodies agreed.

(add new in addition) if arbitration failed, can file law suit to the people’s court.

The right to revise this law is with the People’s congress

Deleted.

Foreign Investment Law revision 1986, the Law on Foreign

Investment was enacted. It was revised in 2000.

Foreign Investment Law revisionBefore revision After revisionNo. 1, Article 3: the establishment of FIE be conducive to China’s economic development, using advanced technology and equipment, or all or most products to export.

establishment of FIE be conducive to China’s economic development, encouraging export-oriented FIEs or type with advanced technology

No. 1, Article 11: FIE production plan must inform government agency

Deleted

Foreign Investment Law revisionBefore revision After revision

Article 15: for purchase of raw materials, fuel etc, under euqal conditions, domestic suppliers have priority.

According to the market principle, can be acquired from either domestic or foreign suppliers

N0. 3, Article 18: FIE be self-balancing in FX. agency approved for sales in doemstic market be responsible for solving FIE’s FX problem

Deleted.

Before revision After revision

Article 15: for purchase of raw materials, fuel etc, under euqal conditions, domestic suppliers have priority.

According to the market principle, can be acquired from either domestic or foreign suppliers

N0. 3, Article 18: FIE be self-balancing in FX. agency approved for sales in doemstic market be responsible for solving FIE’s FX problem

Deleted.

Foreign Co-production Law revision The “Law on Foreign Co-

production” was enacted was adopted in 1988.

It was revised in 2000.

Foreign Co-production revision

Before revision After revisionArticle 19: for purchase of raw materials, fuel etc, can either be purchased from domestic or foreign markets

According to market principles, can either be purchased from doemstic or foreign martkets

Article 20: firm responsible for foreign exchange balancing. In case not possible, to be resolved according to relevant regulations

Deleted

FDI under Financial Crisis

Inflow not much affected

The global financial crisis did not have much negative impacts on inward direct investment.

The inflow volume rose by 29.7 percent in 2008, and in 2009, there was a mere drop by 2.6 percent.

2007, $83.5 billion; 2008, $108.3 billion; 2009 $90 billion

Export-oriented FDI more volatile While China was able to maintain a

high growth rate, saw a modest decline in export-oriented FDI in 2009.

In the second half of the year, inward FDI to many Asian economies recovered quite rapidly, almost offsetting the steep fall in the first half year.

Low share of M&A

M&A direct investment tends to be much more volatile than greenfield investment.

China has the lowest ratio of M&A to total direct investment, 6 percent.

Region/economy 2007 2008Growthrate(%)

2009Growthrate(%)

2007 2008 2009

World 1031.1 706.5 -31.5 239.9 -66.0 52.1 41.6 23.1Developed economies 903.4 581.4 -35.6 195.4 -66.4 66.5 60.4 34.5Japan 16.1 9.3 -42.3 -5.9 -163.5 71.6 38.1 -51.8Developing economies 97.0 104.8 8.0 37.7 -64.0 18.3 16.9 9.3Asia and Oceania 68.5 68.2 -0.5 36.5 -46.5 20.6 17.5 13.8West Asia 23.0 16.3 -29.1 2.3 -85.9 29.6 18.1 4.5South, East and South-East Asia 45.3 52.6 16.0 34.1 -35.1 17.9 17.7 16.8China 9.3 5.4 -41.8 11.2 108.5 11.1 5.8 12.4Hong Kong, China 7.0 8.7 25.0 2.1 -75.3 12.8 13.8 5.8India 4.4 10.4 136.0 6.2 -40.5 17.5 25.0 18.5Indonesia 1.7 2.1 23.2 1.3 -34.9 24.6 26.6 25.5Malaysia 3.9 2.8 -28.7 0.2 -93.0 46.7 34.6 7.4Singapore 7.4 14.2 91.3 9.7 -32.1 23.5 62.6 53.0Thailand 2.4 0.1 -95.8 0.3 142.4 21.1 1.0 6.5

Sources: UNCTAD, World Investment Report 2009, Global Investment Trends Monitor, 19 January 2010

Net cross-border M&A sales (US$ billion) M&As/FDI inflow (%)

M&A Sales/FDI Inflow Ratio in Selected Countries

Notes: Net cross-border M&A sales in a host economy = Sales of companies in the host economy to foreign TNCs (-)Sales of foreign affiliates in the host economy.

Company Sector Country Amount Target

Apr. 09 CNPC, PetroChina Oil/Gas Kazakhstan 3.3 Kazmunajgaz

May. 09 PetroChina Oil Singapore 1Singapore Petroleum,45.5 percent

May. 09 Minmetals Metals Australia 0.9 OZ MineralsJun. 09 Sinopec Oil Switzerland 7.2 Addax PetroleumJul. 09 CNPC & Sinopec Oil Angola 1.3 Marathon Oils’ fieldAug. 09 Yanzhou Coal Coal Australia 2.9 Felix Resources

Sep. 09 CIC Oil/Gas Kazakhstan 0.9 Kazmunajgaz

Oct. 09 Jein Jein Nickel Metals Canada 2 Canadian Royalties

Oct. 09 CIC Oil Russia 0.345 percent stake in NobelOil

Oct. 09 PetroChina Oil Canada 2 Athabasca oil sands

Nov. 09 CNOOC Oil US 0.1Norway Statoil’s 20 of451 drilling leases

Nov. 09 Baosteel Group Metals Australia 0.3 Aquila

Dec. 09Xi'an Aircraft IndustryGroup, ATL

Manufacture Austria 0.1 FACC, 91.25 percent

Sep. 09 Chinalco Aluminum RussiaA stake in UC Rusal,world’s largest producer

Oct. 09 CNOOC Oil Nigeria Offshore oil fields

Dec. 09 Sinachem petrochemical Australia 2.3 Nufarm

Oct, 09China NonferousMetals

Rare minerals AustraliaAustralia requested stakein Lynas be cut below 50

Sep, 09 CNOOC Oil Nigeria 4 Kosmos stake in oil fieldJune, 09 Chinalco metals Australia 19.5 Rio Tinto

Sources: World Bank, www.people.com.cn.

China Foreign Acquisitions in 2009

I. Successful aquistions

II. Acquisitions in process

III. Unsuccessful acquisitions

Service outsourcing to China reached more than US$60 billion in 2007.

China has been among one of 30 top destinations for offshore IT operations, and it is believed to be an emerging leader in service outsourcing.

A measurement of offshore service outsourcing is based on Extended Balance of Payments Services Classification (EBOPS) data.

It provides an upper limit for estimate of offshore services to China.

The export of transportation, communications, financial and insurance services (FIS), computer and information services (CIS), and other business services (OBS) from 2000 to 2008.

The largest type of service export is OBS, amounted to US$46.3 billion in 2008, followed by transportation service.

All types of services export increased substantially during the period. Among them, the export of CIS increased by 17.6 times, while OBS export increased by 6 times, which indicates a quick expansion of IT outsource to China.

Exports of Selected Services (US Mn Dollars)

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Computer and information services Other business services Transportation

Communications services Financial and Insurance Services Total

Source: United Nations Service Trade Statistics Database

Exports of Parts and Accessories (US Million Dollars)

0

50,000

100,000

150,000

200,000

250,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Parts and accessories of capital goods

Parts and accessories of transport equipment

Total

Source: United Nations Commodity Trade Statistics Database

What do two TRILLION dollars FX reserves look like?

All this talk about "stimulus packages" and "bailouts"...

A billion dollars... A hundred billion dollars... Eight hundred billion dollars... One TRILLION dollars... What does that look like?

We'll start with a $100 dollar bill. Currently the largest U.S.

denomination in general circulation.

Most everyone has seen them, slighty fewer have owned them.

100 dollars

A packet of one hundred $100 bills is less than 1/2" thick and contains $10,000.

Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun.

10,000 dollars

The next little pile is $1 million dollars (100 packets of $10,000).

You could stuff that into a grocery bag and walk around with it.

1 million dollars

While a measly $1 million looked a little unimpressive, $100 million is a little more respectable.

It fits neatly on a standard pallet...

100 million dollars

And $1 BILLION dollars... Now we're really getting

somewhere...

1 BILLION dollars

Next ONE TRILLION dollars. This is that number we've been

hearing so much about. What is a trillion dollars? It's a million million. It's a thousand billion. It's a one followed by 12 zeros.

One trillion dollars!

Notice those pallets are double stacked.

So the next time you hear someone toss around the phrase "trillion dollars"... that's what they're talking about.

Thank you！