Breaking China s Investment Addiction

The China Investment Challenge

The first is the high return on foreign investment in China.

An increase in FDI outflows is a priority in China for two reasons.

Its stock of foreign capital will increase steadily as foreign firms invest and reinvest in China.

Indeed, China s investment rate may have surpassed 50 in 2009.

The level of Chinese FDI flowing into Africa at present is staggering.

First, China, with its enormous productivity increases based on resting on high levels of investment, including investments in education and technology exported its deflation.

For example, Asian investment is booming again, led by China.

Mr. Yu Hua, Deputy Director General, China Investment Promotion Agency, Beijing, China

Far more important, especially for Germany, is to get China to invest in and hold its bonds.

In 2007, President Hu Jintao proclaimed the importance of investing in China s soft power.

China s development of the Ainak Copper Mine is the largest single foreign direct investment in Afghanistan s history.

In the case of China, OFDI approval procedures have been simplified and the Investment Promotion Agency, established under the Ministry of Commerce, provides support in helping Chinese enterprises to invest abroad.

For example, the Government of China is promoting outward FDI by providing loans on preferential terms, tax rebates and investment insurance.

That is why China established its sovereign wealth fund, China Investment Corporation, and why CIC decision makers are seeking more FDI opportunities.

For China, it is excessive reliance on fixed asset investment for growth.

At least 38 US states now host FDI projects from China, and competition for Chinese investment has intensified as states budgets have contracted.

China, India, Brazil, Malaysia and South Africa have been among the leading developing countries in making foreign direct investments.

Of equal importance were the rise of China and the decline of investment in Asia following the 1997 1998 financial crisis.

Also driving China s high investment rate is the declining efficiency of investment capital, reflected in China s high incremental capital output ratio (annual investment divided by annual output growth).

The country s investment rate now stands at more than 50 a clear reflection of China s low capital efficiency.

Singapore's OFDI to China and Indonesia grew significantly in 1993 2003.

A large amount of Singapore's OFDI to China was also channelled through Hong Kong (China) (table 1).

Indeed, China s development of the Aynak Copper Mine was the largest single foreign direct investment in Afghanistan s history.

Currently, the US receives only about 2 3 of FDI flows from China.

In other words, rather than shifting from investment led to consumer led growth, China appears to be continuing along its investment led growth track.

Similarly, Chinese residential investment and commercial real estate activity are slowing sharply as home prices start to fall.

In terms of investment, the International Monetary Fund predicts that a disruption in China s investment boom will adversely affect its trading partners.

Indeed, even after the new stimulus package, China will still depend on investment and export for growth.

China s real estate investment accounted for 10 of GDP, and slower investment growth in the sector necessarily reduces import demand, directly and indirectly.

In 1995 2010, when China s average annual GDP growth rate was 9.9 , fixed asset investment (investment in infrastructure and real estate projects) increased by a factor of 11.2, rising at an average annual rate of 20 .

China s economy is prone to rapid growth, with buoyant investment demand sustaining powerful short term inflationary pressures.

Indeed, China has done this by expanding its qualified domestic institutional investor program to allow more investment abroad.

Finally, an opportunity for developing country negotiators and policy makers to share their experiences in the formulation and implementation of South South IIAs would facilitate the identification of best practices.

In some host countries (e.g. China and Malaysia), ethnicity and social connections played a role in motivating Singaporean investments there.

The key to restoring China s GDP growth is, therefore, returning fixed asset investment growth to at least 25 .

The problem is that the investment share of China s GDP is already about 50 , while double digit investment growth in 2013 is expected to push that rate still higher.

But Chinese officials worry that the shift from investment to consumption, and from manufacturing to services, will mean slower growth.

In China, a hard economic landing looks increasingly likely as the investment bubble deflates and net exports shrink.

As a result, whenever the US dollar declines, China s net international investment position (the difference between its external financial assets and liabilities) deteriorates and so does its investment income balance.

While China has kept its economy going by making investments in education, technology, and infrastructure, Europe and America have been cutting back.

Although this model is unsustainable, China s over reliance on investment is showing no signs of waning.

This model presupposes that China will develop domestic capital, rather than simply relying on foreign investment.

In fact, over the next decade, as China attempts to move up the value chain into services and adjusts to a shrinking workforce, its investment requirements will shrink and its investment rate will fall sharply.