• Top destination for FDI for sixteen years.• US $52.39 B in FDI to China in the first half of 2008 – a45.6% increase over the same period in 2007.• Foreign invested enterprises (“FIEs”) play a major role inChina’s economy – 58% of imports and exports.• Top foreign investors: HK first; US sixth.• Top FDI destination: eastern region – 81.9%.• Hot sectors: manufacturing (57.7%) and real estate(11.9%).
• Before 1978, China’s economy was one of the mostautarkic in the world.• 1950s : Only four joint ventures with the government ofthe Soviet Union.• Between mid 1950s and late 1970s : China turned inwardand pursued an economic development strategy thatprohibited any foreign investment.• 1980 : First joint venture in China was established inBeijing.
• Inward FDI permitted• Equity Joint Venture Law (EJV Law) by the NationalPeople’s Congress in 1979.• Instead of Equity Ceilings, it imposed Equity Floors.• Only central government approved wholly ownedsubsidiaries of foreign firms.• Long approval delays; eg: 3M (1981-1984)• 4 SEZ established in southern China in 1980, inShenzhen, Zhuhai, Xiamen, and Shantou.
• Treatment of FIEs became further codified• “Wholly Foreign-Owned Enterprise Law” in 1986 and the“Sino-Foreign Cooperative Joint Venture Law” in 1988• Legal infrastructure governing 3 main forms of FIEs- EquityJoint Ventures, Cooperative Joint Ventures & Wholly Foreign-Owned Subsidiaries.• 1986 Regulations separated FIEs in 2 kinds- Qualifying forfavorable policy and regulatory treatments and Qualifying fornormal policy and regulatory treatments.• “WFIE Law” in 1986 & Hainan Island in 1988
• This phase removed a large number of the sectorialrestrictions on FDI.• Business scope and geographic coverage of foreign bankswas expanded• Joint ventures in transportation, port development, oilexploration, and financial services were permitted.• By 1992, China had signed bilateral investment treaties with27 countries.• 1992: Chinese and U.S. governments signed a MOU on arange of issues ranging from market access to IPR protection.
• 2nd largest recipient of FDI in the world, following the US• 1995: Policy measures aimed at “leveling the playing field” betweenFIEs and domestic firms• Removal of the tariff exemption on FIEs’ imports of equipment and rawmaterials• 1998: Renewed across-the-board tariff exemption treatment of FIEs• Tariff exemption granted to FIEs in product segments promoted bygovernment.• Same capital equipment and raw material tariff exemption to domestic firms inhigh-tech sectors• Unified corporate income tax rates• 33% for all firms
• 1999: China and U.S. concluded negotiations over China’saccession terms into the WTO• 2001: WTO Ministerial Conference in Doha, Qatar formallyadopted Chinas terms of membership of the WTO• Concessions made on the Chinese side:• Eliminate all import quotas by 2006• Reduce tariffs on industrial products from an average of 24.6% to9.4%• Reduce tariffs on motor vehicles from 80-100% to 25% by 2006• Allow Foreign firms to own up to 50% of FIEs in the telecom andinsurance industries
FDI inflows to China, 1990-20051979-2002: A total of $446billion
Saving Rategrew from 36%to 42% withgrowth of FDI
• Due to large FDI inflow China accumulated huge foreignreserve.• US $300 Billion in 2003• 3% of GDP• Investment in US Treasury Bond• Reserve Surplus helps in controlling domestic currency.
Millions of US dollars-100 000200 000300 000400 000500 000600 000700 000800 000900 0001 000 0002001 2002 2003 2004 2005WorldUnited StatesDeveloping economiesChinaPercent of China in DevelopingEconomies0.005.0010.0015.0020.0025.0030.0035.002001 2002 2003 2004 2005Source- UNCTAD
• Hong Kong, Macao And Taiwan account for more than68% of total FDI inflow in China between 1979-1996.• Hong Kong, Macao And Taiwan are politically samecountry but separate economic entity.• In 2001 three states together have a share of 42%.
To enter any market abroad need huge capital, advancetechnology, scale economy, organizational expertise. Allthese act as a entry barrier for SME to invest as FDI.Still China have a significant SME base FDI investorsmainly due to the three inter states - Hong Kong, MacaoAnd Taiwan
• General FDI trend – congregate around few industries with highconcentration ratio.• FDI in China was contrary to this trend, even for the EthnicallyChinese Economies(ECG) investing firms.• FDI distribution in China was:• More Fragmented.• Evenly distributed across various industries.• For example; the Std. Deviation of FDI across industrieswas 11.3 for Taiwan; but 4.08 for China.• FDI distribution spread across traditional industries like:• Herbal industries• Handicraft industries – Silk engraving, ivory casting etc.
• FDI from ECEs financed China’s labor intensive and exportoriented goods production.• FIE’s – responsible for tremendous Chinese manufacturingexport :• 25% from ECEs funded FIE’s• 47.1% total manufacturing export from altogether• FIEs – strong dominant position in telecom, garments, plastics,leather products etc.• However; two more trends impacted by FIE’s :• Replacing of exports produced by Chinese entrepreneurs.• Substantial decline in contractual alliances with foreign alliances.• Consequently; rise in Equity Alliances.• This trend was further reversed in the beginning of 1997.
• To Protect Domestic Chinese Firms after China JoinedWTO• To Prepare Domestic Firms for FDI , Govt. ChangedRegulatory , Legal and Financial treatment of DomesticFirms
• Grasping The Big – 120 out of 512 SOEs• Strengthening the Asset Base and Upgrading Technologyof SOEs• Reconstructing , Consolidating and supporting LargestSOEs to Compete with MNCs
• Converting SOE’s into Modern Enterprise System – withshareholding Enterprises , Board of Directors , AccountingStandard , Financial Reporting• Reorganizing SOE Asset:Efficiency from Upstream/Downstream Production ,Benefit from Economies of Scale
• Govt. Retains Monopolies in Petroleum and Banking• Discrimination Against Private Enterprises• Did not allowed to enter in industries where they can threat SOE• Property Right protection in favor of SOE• Lending Bias by Commercial Banks• Foreign Exchange Allocation ( Technology ) Favored SOE• Licensing Policy Against Private Firms