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Economy in Brief

China Foreign Direct Investment: Strong but Uneven Gains, Heavy Reliance on Special "Foreign Investment Enterprises"
by Carol Stone September 29, 2005

Further data were reported today on foreign direct investment in China for 2004. These data covered the total value of foreign investment contracts, including direct investment and "others", which covers leasing and other types of financing. The grand total of foreign investment contracts was $156.6 billion, 34% more than in 2003. A special vehicle, "foreign investment enterprises", is the main Chinese counterparty in these transactions. The data for these began in 1989 with $1.7 billion in committed inflows; last year they brought in $117.3 billion. The more familiar "joint venture" ownership vehicle, a partnership between a Chinese and a foreign firm, accounted for $27.6 billion in 2004.

These figures come from contracts for new projects. The flows of actual funding, so-called "capital utilized" are lower as the projects are actually accomplished. In 2004, the total amount of capital utilized was $64.1 billion, up from $56.1 billion in 2003.

As we examined these data, the geographic origins of these funds and ownership interests drew our attention. Hong Kong entities are by far the largest providers of foreign capital for China, with $20.8 billion last year, about 32% of capital utilized. Other Asian interests are well represented, including Japan with $5.5 billion and Korea, $6.3 billion. Notably, last year was the first in which Korean inflows were larger than those from Japan. Western investors were less involved (though perhaps some Hong Kong capital represents a flow-through of Western money). German investors, for instance, have averaged just about $1 billion in Chinese FDI annually in recent years, and the UK, about $800 million. Nine major European countries together invested $3.8 billion last year, compared with $3.9 billion for the US. As seen in the table below, US funding has actually declined recently; it had been $5.4 billion in 2002.

General interest in China is growing, of course. Separate figures on the value of contracts year-to-date show that new contracts for standard FDI projects (excluding the "other" financing categories) are up in the first half of this year by 19% from the first half of 2004. At the same time, this is slower than 30%-40% growth of the prior couple of years. And the flow of capital utilized was actually a bit smaller in the first half of this year than last. In part, this reflects normal volatility in what are by nature uneven, "lumpy" flows. Even so, the impression of a continuously mushrooming volume of outside funding going into China is not quite an accurate one.

Billions of US$ 2005 2004 2003 2002 2001
Total Foreign Capital: 
  Value of Contracts
156.6 116.9 84.8 72.0 71.1
Foreign Capital Utilized 64.1 56.1 55.0 49.7 59.4
Capital Utilized from Hong Kong 20.8 19.5 17.9 17.9 16.7
Japan 5.5 5.1 4.2 4.5 3.1
Korea 6.3 4.5 2.7 2.2 1.5
Germany 1.1 0.9 0.9 1.2 1.0
U.S. 3.9 4.4 5.4 4.5 4.4
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