From “Going Out” to “Going Global”

——Past and Future of China’s Overseas Investment Policy

Dr. Ma Xiaoye, PhD. Economist

Academy for World Watch, Shanghai

aww@aww.ac.cn

Introduction

Overheated report coverageDiplomatic policy?

Facts and interpretation are confusing

Everybody Knows with wild

imagination…

1. Relevant researches

Reports by international organizations

Policy statement by Chinese government

M&A events reports

Data “digging”--BOP v.s. Approval

2. Confusing Data & Concept

Flow & stock (annul & cumulative)Data using “balance of payment” statisticsIMF, OECD, UNCTADMoftec-Ministry of commerce dataDemarcation:2002 onwardsProblem of present statisticsStatistics by region-Hong Kong puzzle

3. Policy formation & background

Preferential loan to foreign trade company before 1994

Loan quota to foreign trade unchanged before 1997, even when fighting against inflation

Dual exchange rate and exchange quota

Incentives encouraging round trip investment: tax benefit and approval conveniences

“Going out”-- OPA of redundant capacity, starting 1997

World economic recession

WTO background: competing abroad

Domestic market saturation

Background of outflow fluctuations

Background not in favor of investing abroad:

Before 1970’s—No diplomatic relations with most of market economies.

“Two kinds of resources and two markets” theory.

Capital scarcity in relative term, even nowadays.

Self-reliance—world market is supplement to domestic marketForeign currency concern.

Inherited governance problem of SOEs

Poor performance—1/3 profitable enterprises, 2/3 running loses

Over-sensitivity on China’s going global policy externally

3, Where are we standing?End of 2004$37billion accumulated; Project completed, $114.03billion; Contracted project value,$156.29billion; Labor cooperation, $30.82billion; Contracted labor value, $36.11bilion. Labor work abroad, 3.193million person.Contracted project breakdown: Real estate: 31%; Transportation: 17%; Petrol-chemical: 10%;p Telecom: 10%; Power: 9%; Manufactures: 9%.

Increase over year 2003:

Number of project: 62.5%;Contract value: 77.8%Average investment value per project: 9.5%

Distribution by industry sectors:Mining, $1.91billion, 52.8% of total; Commercial service, $0.96billion, 26.5% of total; Manufacture, $490million, 13.2% of total; Wholesale and retailing, $110million, 3%; Others, $150million, 4.2% of total.

3 years since WTO accession

2002 2003 2004

$2.7billion $2.85billion $3.62billion

  Increase by 5.5% Increase by 27%

4, Enforceable policy measures—status quo

“16th party congress” decision:Attract-in and going-out are equal important“Decision on reform of investment regime” 2003Pending “Administrative regulation” Risk assessment for approval—11 items reduced to 5Currency purchase quota—reviewed case by caseDeposit for profit rebate—eliminated

2001 onwardDecentralized 3.3 billion foreign currency purchase quota

approval for investing abroadSelf earned foreign currency—subject to approvalDomestic foreign currency loan—subject to scrutinyIncrease of investment amount (equity)—same as above approvalNot possible to get cash

New approval procedure starting Oct 2004•Scope: Oversees assets and management right acquired through exchange of cash, securities, materials, IPR, technology, stock, bond or guarantee. •Approval authorization on intended investment projects (Resources)State council: $200millionState commission of development and reform: $30million upwardsLocal commission of development and reform: Below $30million•SOEs directly under control of central government may make investment decision on its own and report afterwards, subject to a ceiling of $30million.•VerificationAny change of the investment up to 20% of the original amount will be subject to re-approval.

Foreign currency purchase approval agencies$50million and above-- state council.$10million and above--state commission of development and reform.

Any amount bellows $10million--provincial commission of development and reform. Layers of approval by administration

SOEs directly under control of central government ＞ state commission of development and reform ＞ state council.

Other enterprises ＞ provincial commission of development and reform ＞ state commission of development and reform ＞ state council.

Time needed for approvalState commission of development and reform, 20-30 days.Other government institutions concerned, 7 days.7 days prior report required for bidding abroad.Fore front guarantee also subject to approval.

--Resources scarcity--Over capacity of manufacture--Unreleased domestic consumption power, especially in rural area--Insufficient R&D input at all level—0.75%--Protectionist challenge--Processing center instead of manufacture center

Still some way to go as a policy with enforcement measuresPositive factors:112 bilateral investment protection agreements87 agreements on avoiding double taxationMOU on labor cooperationArrangement on social securitiesNegative factors:No investment lawYet to open capital account Currency controlBank loans availabilityInvestment insurance

5, Some phenomena

Not many case show vertical value chain extending like logistics & after sale services (12.6% in 2003)Manufactures mainly are household electronic applicantsResources (48.2% in 2003)Few R&D investmentGeographic distribution is changing positively (Asia attracts 80%)Greenfield investment are mainly assembling operationSOEs account for 43% in 2003

6, Will China pour money globally?

Ministry of finance and PBOC concernSOE governancePer capita capital formation constraintLess developed economy in term of GDPUrbanization and employment challengeCorruption sensitiveness“Two ends” abroad Currency appreciation incentiveDomestic market saturation