A Brief Analysis in China’s Management of ODI Scale Presentation for the Forum on Investment Promotion and Technology Transfer through South-South Cooperation Xia Men City Hu, Yuandong Head of UNIDO ITPO-China September 2007 For all countries, to attract FDI is one of the key issues of the economic development. The management of inward FDI scale is therefore a very important task of a government on its macro economic control, particularly of the developing countries. China attracts worldwide attention on the level of its paid-in overseas direct investment (ODI) on total of USD 750 billion by the end of 2006 (610,000 FIE companies), over USD69.48 billion alone in 2006, ranking the first in the world. However, to manage such huge resources in an active, rational, effective way requires policy-makers and the practitioners of the countries on economic transition have to have the proper strategic planning, organizing, executing and controlling ability. How to measure the pro and core of FDI scale depends on result justification taking into account of the challenge, the time, the cost and the benefit at the strategic level. The General View of China’s Management in FDI Through the macro policy navigation at different time frames and the level of national economic development, the scale of China’s inward FDI has been properly managed to a large extent on industries, on geographical location, on sectors and on way of investment. Thus, due to the theoretical lag and the effect of the global economic situation and the overall national fiscal management, China’s FDI scale management is still on way of its experiment and leaves much room for further endeavor. This presentation highlights the necessity, effectiveness, pro and core of China’s FDI scale management. Large Scale of China’s FDI is Realized in Stages through Proper Regional Development Management Regional Dev. Management in stages: -- 1979-1983 SEZs dev. -- 1984-1987 16 port cities+61 cities -- 1988-1991 Liaodong Peninsula, Shandong Peninsula, Pudong New Dev. Are, Bounded Areas Dev. -- 1992-1999 “Four-Along Opening Strategy” -- 2000-Now “Western Region Dev. Strategy” -- 2003-Now “China Northeast Rejuvenation Program” -- 2005-Now “Mid-China Development” China Western Region Mid-China Region Large Scale of China’s FDI is Realized in Stages through Proper Industrial Development Management China has adopted the strategy of opening the primary and secondary industries first and the tertiary industry later. Since 1990, China began shifting its focus to industrial opening in order to attract FDI, expedite economic restructuring and industrial upgrading, and improve the internal quality and competitiveness of its economy. Since 1992, China further expanded the field for FDI, allowing pilot investment in commerce, foreign trade, finance, insurance, aviation, legal services, accounting services through Catalogue Guide on FDI Three stages of China's utilization of overseas capital since the reform adopted in 1979 The first stage (1979-1991), the transitional period from the Planned Economic to the socialist Market Economy. The aim was to rationalize industry set-up based on the import replacement and export-oriented policy. The inward ODI during this period stood at USD26.7billion, mainly from HK, Macro and Taiwan. The second stage (1992-2002), along with the establishment of the market economy. Deng Xiaoping, the Chief Architect of China’s reform and opening policy, made a series of speeches during one of his South China Tours at the beginning of 1992. He pointed out that the fundamental difference between the socialism and the capitalism is not the mode of Planned Economy or Market Economy. During this period, inward ODI increased greatly from 37.8% of the total foreign capital flow to 77.7% in 1998 and remains at this level thereafter. The Characteristics of China’s Fiscal Situation With huge domestic savings (RMB15trillion by the end of 2006) and the foreign currency reserve (USD1330 billion at the end of Aug. 2007), China would have had no capital shortage problem as of the other developing countries do if the mission capital had not occurred. The mission part comes from two ways: the sedimentation of domestic banks' capital flow and the outflow of China's capital. The common figure is that the dead loan of China’s commercial banks stood at 24% and more than 26% of the domestic capital out flowed first and then, came back in name of foreign investment with the intention to enjoy the preferential investment policies. A huge portion of ODI came from overseas Chinese investment. The Possible Scale of Inward FDI The scale of a country to absorb FDI depends largely on two elements: -- internally, a country’s investment environment; -- externally, the dynamic change on the global capital market It is the question of demand and the supply. Whether a country could effectively attract FDI firstly depends on this country’s FDI policy: 3 kind of approaches 1. Discriminate Policy towards FDI; 2. Preferential FDI policy; 3. National treatment. The Indicators of Proper Inward FDI Scale Globally, there is no unified indicator. In China, there are two kinds of views: One view is that the current scale of FDI should be controlled. The reasons are: High risk will arise if relying heavily on foreign capital. “honey could also be poison”. China has large domestic reserve. Foreign capital could not replace the domestic one. The priority is not how to attract more FDI, but working out more investment channels to turn the domestic reserve into efficient investment. The level of China’s market development as well as the absorbing ability of foreign capital is far from that of the industrialized countries. Absorbing FDI should take China’s current economic base, the market condition, the technology level into consideration. The FDI scale itself is not means but the ways to increase productivity. If the healthy economic return both at macro and micro achieved through such FDI utilization, big scale is not a problem. However, if the economic benefit is negative, even small scale could be a danger. Safety Indicator: (1) the equity control rate of FDI; (2) the brand control rate of foreign enterprises; (3) the market rate of foreign enterprises. The other view is: The current scale of FDI is not more than enough but far from sufficient. The reasons are: China is such a huge country at fast economic growing period, the inward foreign capital scale should be doubled. The per capita inward FDI is quiet low, only around USD53 in 2006 compared with USD185 of the world average; With 1.3 billion population, the labor force reaches nearly 700 million, 1/4 of the world total. China’s capital resource in a long run relatively scarce. More investment both domestic and foreign ones is needed. China’s foreign capital scale is still below the alarming rate: debt service ratio, debt ratio and liability rate are below 20%,25% and 100 respectively. FDI is “a two-edge sward” The benefits of the inward FDI to the Chinese economy are strait-forward: The promotion on the economic growth and the economic system reform; The promotion on employment; The promotion on industrial sector development; The promotion on international trade and balance of payments; The promotion on technological innovation. FDI is “a two-edge sward” The costs are also evident: Its impact on the national economic security; Its impact on the financial security; Its impact on the industry and market security; Its impact on the security of natural resources; Its impact on the national sovereignty and the public security. FDI & National Economic Security The safety scale is 30% of total economy. The tax/employment/number of FDI enterprises are within 30% is the controlling scale. Beyond the such level, it will threaten to a certain degree on national economy. For China, 10% on employment (28 million); 21% tax; 13% fix assets investment; 30% on national industry output. It is below the alarming line. There are 3 risk indicators for a country’s foreign debt: debt service ratio, debt ratio The new approach towards economic security: FDI & Industries/Market Security 3 considerations by the practitioners: --- Overall Market Occupation, the alarming line is below 20%; --- General Industries Occupation, the alarming line is below 30%; --- Key Industry sectors, the alarming line is below 10% The principle of the management on inward FDI scale is the proper “degree”. With a proper degree, the inward FDI could be used in a rationalized and most effective manner. How to set such a “degree”? Chinese authorities take both global and domestic elements into consideration: 1. Globally: (1) the situation of the global capital market: its scale, mode, flow trend and industry sector movement that effect on China’s inward FDI. (2) Investor’s choice based on profit-oriented motivation. (3)The competition on FDI. Domestic: The domestic economic growth situation. FDI scale should be in compatible with the overall economic development. According to the past 28 years’ inward FDI contribution to the national economic growth, for instance, USD250 billion needed to reach 7.5% GDP growth per year at 10th five year’s economic plan period. In another word, in order to have inward FDE reach the level of 8%-16% of China’s national fixed assets investment, USD50-100 billion FDI is needed each year. Domestic: The domestic constraint on FDI utilization. The productivity level has its decisive effect on the overall FDI scale. (a) the ability to absorb FDI in a proper way particularly in terms of technology digest, management level, the scare human resource. (b) The supplementary or coordinative ability to the inward FDI such as the policy coordination, domestic capital coordination, raw material coordination. (c) Debt service capacity. The scale of using foreign capital depends on the repayment ability. The key to increase such ability is to enhance export and increase foreign income. Therefore, the inward FDI assists to a large extent on the export earning which could enhance the repayment ability. (3) The domestic capital supply situation. Considering the shortage in domestic saving and the foreign currency saving and the efficiency of capital utilization. FDI & the Ownership of FDI Enterprises Generally, there is no high limit for FDI, but the bottom line is 25%. No preferential treatment the FDI enterprise could enjoy if its equity investment below this line. For those key industry sectors, the ceiling is 49% of foreign ownership. Only after China entered WTO at the end of 2001, such limitation be released gradually by the key sectors. While viewing on global and domestic situation, the Chinese authorities consider the following key issues: The relations of the scale of FDI and the inward FDI structure. The consistent adjustment of its foreign capital utilization management policies. Usually, at the beginning of “opening up”, a developing country may be at the stage of “better than none”. With attitude of “no rejection”. It is not on the agenda to control and manage the FDI scale, technology level, industry structure at this moment. However, China’s strategy on foreign capital utilization is based on the four principles: Comprehensive consideration on the need of economic development; the actual absorbing foreign capital ability; foreign capital repayment ability and the safety on the basis of efficient use the domestic resources. Ending Remark The timing is essential to the proper macro management; The “degree” control is the theme of the macro manage- ment; The cost and benefit analysis is the core of the macro management; Un-predictability of the risk and the risk identification is the biggest challenge of the macro management; FDI utilization is a dynamic process and its management should emphasize the implement-able planning, comprehensiveness, predictability, rationalization, and systematization, science-based and high efficiency in the certain time frame. If it could be used in a rational, effective manner, then, inward FDI should be the more the better.