...Perspectives on China's Outward Foreign Direct Investment Randall Morck University of Alberta School of Business and NBER Tel: (780) 492-5683 randall.morck@ualberta.ca Bernard Yeung Stern School of Business New York University Tel: (212) 998-0425 byeung@stern.nyu.edu Minyuan Zhao Ross School of Business University of Michigan Tel: (734) 647-6978 myzhao@umich.edu June 2007 * The authors are grateful for the helpful comments from William Allen, Tom Pugel, Myles Shaver, Jordan Siegel, and Changqi Wu. Perspectives on China's Outward Foreign Direct Investment Randall Morck Bernard Yeung Minyuan Zhao Abstract Recent economic data reveal that, at the infant stage, China’s outward foreign direct investment (FDI) is biased towards tax haven countries and South East Asian countries and are mostly conducted by State controlled enterprises with government sanctioned monopoly status. Further examination of China’s savings rate, corporate ownership structures, and bank dominated capital allocation suggests that, although a surge in China’s outward FDI might be economically sensible, the most active players have incentives to conduct excessive outward FDI while capital constraints limit players that most likely have value-creating FDI opportunities. We then discuss plausible firm-level justifications for China’s outward FDI flow, its importance, and promising avenues for further research. I. Introduction Barely thirty years ago, most would consider China a poor agricultural...
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... "The fact that so much foreign money has been of the FDI variety has helped shield China from the kind of jolts recently administered to other Asian economies where a higher proportion of investment was indirect -- such as bank lending or stock portfolios." Strong evidence of China's emergence as a global economic powerhouse are these twin facts: a large foreign exchange reserve that China is holding, especially in dollar-denominated assets, and a large amount of foreign direct investment (FDI) going into China that rivals FDI into the United States. A popular (and politically charged) explanation for these facts runs as follows: China's rapid rise in the foreign exchange reserve is a consequence of its mercantilist policy, exporting like mad by relying on a deliberately undervalued currency, cheap labor, and foreign investors, particularly those from the United States. But in The Chinese Approach to Capital Inflows: Patterns and Possible Explanations (NBER Working Paper No. 11306), authors Eswar Prasad and Shang-Jin Wei suggest that the reasons behind China's increased foreign exchange reserve and its success at attracting FDI -- as opposed to more volatile financial and equity markets --are too complex for this kind of simple theory. They argue that the mercantilist explanation is an "intriguing story, but the facts do not support it." To start with, they note that more than 87 percent of the acceleration in the increase in China's foreign reserve holding from the...
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...Yuan, float freely against the dollar. [1]Why do you think the Chinese government originally pegged the value of the Yuan against the U.S. dollar? What were the benefits of doing this to China? What were the costs? Comments: Most of the Chinese exports are made from dollar-denominated imported materials and energy. By pegging to the dollar, China managed its foreign exchange risk in these areas. It also mitigated the risk for investors coming into China. Also, China’s economy, through its peg to the dollar, has remained stable. It was not drawn into the Asian meltdown in 1997. One of the costs of pegging is that the Chinese government has to manage the peg. Thus, it is active in the foreign exchange markets. Another cost is that the dollar’s movement, up or down, affects the Chinese economy. [2]Over the last decade, many foreign firms have invested in China, and used their Chinese factories to produce goods for export. If the Yuan is allowed to float freely against the U.S. dollar on the foreign exchange markets, and appreciates in value, how might this affect the fortunes of those enterprises? Comments: Since they are moving raw materials into China, using Chinese labor, and then exporting, their production costs will rise in China (Yuan strengthening against the dollar) in dollar terms. The value of their investment in China will increase as the dollar weakens. Selling into the Chinese market may become more attractive to substitute for...
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...An Inflection Point in Chinese Capital Markets JC de Swaan Caijing Magazine July 3rd, 2009 The institutional development of Chinese capital markets has lagged – while a growing body of academic literature has demonstrated the positive linkages between the development of capital markets and economic growth, China has managed to grow at a breath-taking 10% CAGR over the last 30 years despite lacking commensurately developed capital markets. Several announcements in the past months suggest a potential shift – China may be finally paving the way to modernize and open up its capital markets, a process that has been long in the making. This time however, a date has been set with the announced objective of turning Shanghai into a global financial hub by 2020. In order to achieve that goal, several seminal changes will need to take place. Foremost among these will be convertibility of the Rmb and opening up of equity capital markets to foreign investors beyond the tightly controlled QFII program in existence. A set of domestic-oriented reforms, including a broadening of financial service offerings, will also be critical to the transformation. While the US-borne financial crisis has triggered much soul-searching in developed economies and a vigorous debate on reforms of financial institutions, it has had none of that effect in China. If anything, it appears to have accelerated plans to reform Chinese capital markets. At a high level, this can be seen as part of a broader effort to assert...
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...When investigating the Boxer rebellion it was revealed that, for the Chinese, the old political adage that ‘despite the best-laid plans, not all desires are realised’ is proven true. In the 19th century, many Chinese peasants were starving and anguished due to recurring drought, and famine. This turned out to be the main motive for the uprising of the Boxer Rebellion. Multiple forms of local corruption also meant that the peasants were paying far more tax than they could manage. Different forms of natural disasters within China were gradually becoming more common. This started to affect the Chinese economy and the lives of numerous peasants, farmers and fishermen (Brodie, 2008).Several peasants believed that the actions of humans and the Heavens were connected, and...
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...in Hong Kong: Dim Sum or Synthetic? Overview 1 2 5 Table of Contents: OVERVIEW MARKET PERSPECTIVE SURGE IN RENMINBI DEPOSITS AND TRADE SETTLEMENTS IN HONG KONG GROWTH IN RENMINBI TRADE SETTLEMENTS SUBJECT TO REGULATORY MEASURES SURGE IN DIM-SUM BOND ISSUANCE DIVERSIFICATION OF ISSUERS THE “DIM-SUM SUBSTITUTE”: SYNTHETIC RENMINBI BONDS 6 6 7 9 This report addresses recent developments in the offshore market for bonds denominated in mainland China’s currency, the Renminbi (RMB), whether settled in RMB or another currency. Called “dim sum” bonds when settled in RMB or “synthetic” if settled in other currencies such as U.S. dollars, these debt instruments have so far come out primarily in Hong Kong, with several synthetic convertible bonds in Singapore. However, in future, Chinese authorities may allow offshore RMB transactions elsewhere, and more euro-RMB bonds1 issued in other financial centers could soon appear. A comment answering investors’ frequently asked questions on our approach to rating both types of these bonds will follow within a few weeks. The progressive internationalization of the RMB will facilitate growth in Hong Kong of both kinds of RMB-denominated bonds. In particular, the rapidly expanding volume of the city’s deposits and of trade settlements in RMB has driven growth in dim-sum bonds, and the Chinese government’s allowance last week for Chinese enterprises to settle direct overseas investment in RMB will catalyze this trend. However, the market is...
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...Shipping has been an important human activity, especially where prosperity depended primarily on international trade and interregional trade. Transportation has been one of the main factors of globalization, along with communications, international standardization, and trade liberalization. Due to a number of technological, economic, and socio-cultural forces, only limited country can keep itself fully isolated from the economic activities of other countries. Many countries have seen enormous economic growth in the recent past due to their willingness to open their borders and markets to foreign investment and trade. This increased flow of knowledge, resources, goods, and services among world’s nations is called “globalization”, formally defined as the development of an increasingly integrated global economy marked especially by free trade, free flow of capital, and the tapping of cheaper foreign labor markets. Introduction Marine transportation is an integral, if sometimes less publicly visible, part of the global economy. The marine transportation system is a network of specialized vessels, the ports they visit, and transportation infrastructure from factories to terminals to distribution centers to markets. Maritime transportation is a necessary complement to and occasional substitute for other modes of freight transportation. For many commodities and trade routes, there is no direct substitute for waterborne commerce. The Important of Maritime Transport in the Global...
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...Malaysian Housing Market: Foreign Direct Investment (FDI) The success of Malaysia’s housing market today is coming from a number of economic factors that need to be aware of when considering about the investment. Malaysia is the one of the fastest growing economies in the region. City investment focusing on the capital, Kuala Lumpur is booming due to the direct foreign investment from China, United States and Japan. A surge happened in economic activity. The surge actually has been predicted to be increase in worker numbers to 27.9% by 2013 over a 10 year period. It is because of the high demand of quality commercial and residential real estate in and around the city. Off-plan properties sell to the international property developers and positively...
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...The objective of this term paper is to give a definition of inbound and outbound tourism, the rate of growth of inbound and outbound tourism in China and some of the trends associated with these growths. INBOUND AND OUTBOUND TOURISM IN CHINA INTRODUCTION: Tourism in China has greatly expanded over the last few decades since the beginning of reform and opening. The emergence of a newly rich middle class and an easing of restrictions on movement by the Chinese authorities are both fuelling this travel boom. China has become one of the world’s most-watched and hottest inbound and outbound tourist markets. The world is on the cusp of a sustained Chinese tourism boom. ( Factbox- Basic Facts about China`s economy). China is the third most visited country in the world. The number of overseas tourists was 55.98 million in 2010. Foreign exchange income was 45.8 billion U.S. dollars, the world's fourth largest in 2010. The number of domestic tourist visits totalled 1.61 billion, with a total income of 777.1 billion Yuan. According to the World Tourism Organisation, in 2020, China will become the largest tourist country and among the largest for overseas travel. In terms of total outbound travel spending, China is expected to be the fastest growing in the world from 2006 all the way to 2015, jumping into the number two slot for total...
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...the seventh Bangladesh-China Friendship Bridge at Kajirtek. The two countries would carry out cooperation in hybrid rice cultivation technology, farm products processing and technical personnel training, according to the statement. Moreover, both sides decided to strengthen cooperation on flood control, disaster alleviation, water resources management and hydrological data sharing, it said. Bangladesh hoped China would launch a communications satellite for Bangladesh in the near future and China expressed interest in cooperating, said the statement. A team of Chinese medical experts would visit Bangladesh to offer free medical treatment to cataract patients. China agreed to increase the number of scholarships to Bangladeshi students. The Bangladeshi side reiterated the government of the People’s Republic of China is the sole legal government representing China, and Taiwan and Tibet are inalienable parts of Chinese territory, said the statement. Bangladesh, China forwarding road link via Myanmar and space cooperation The two countries will discuss constructing a road link for connecting China with...
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...benefits for them, which include more job capacity, increase in production and increase of sales. In the other hand, China called the tariff a “serious case of protectionism” due to the negative economic effects that imports of tires were causing to American employment and domestic production. China argues that while the tariff increases jobs in production sector, it also has a negative effect in jobs of sale sector, now some people who used to sell tires from overseas have lost their job. According to the Business Dictionary (2015) market disruption is “A decline in sales to the extent major economic hardships occur, such as one created by surge in imports at the expense of domestic industry” (p. 1). By following this definition, it can be assumed that the decrease of sales of American tires was caused by the amount of imports of Chinese tires. China is known for its ability of mass production at a low price, many companies opt for choosing China as supplier or workforce, but when it is not controlled, this could cause instability in the economy of a country. In one side, the company saves money for outsourcing in China, and so it can offers products at a lower price than competitors, the problem lays in the fact that some competitors are local companies that employs citizens which at the same time pay taxes to government and are directly affected for the amount of imports. In the side of China, it gets more benefits when it...
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...http://economyincrisis.org/content/rising-employment-grows-trade-deficit-due-to-free-trade-policies Trade Deficit Grows Due to Free Trade Policies April 10, 2012 Karl Rusnak 1 Comment Unemployment is rampant in the United States today, and Americans are rightfully asking for policies that will bring the problem under control. Unfortunately under our current free trade policies there is a direct correlation between unemployment and the trade deficit. As unemployment decreases we see a rise in the trade deficit because we have become so dependent on imports for our needs. This means that, until we fix our trade policies, any gains in unemployment will be tempered by a ballooning trade deficit. An economy with a massive trade deficit is unsustainable, and we must change our trade policies if we want to see our nation prosper. The official unemployment figure is currently 8.2 percent. Many economists estimate the rate at which the economy is considered to be at full employment to be about 4 percent, because even under the best conditions there will be individuals seeking jobs. Certainly full employment is desirable, but under our current policies it would do little to create any long-term prosperity for the United States. Our trade deficit was over $500 billion last year, but at full employment it is estimated that we would have a trade deficit of $750 billion or more. As more Americans get jobs, they have more purchasing power. Unfortunately many of the items Americans...
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...logistics (Import) Farmers & Laborers Manufacture Outbound logistics (export) Over the last fifty years, the U.S. cotton industry has seen a great reduction in labor force, a significant feat in agriculture R&D and engineering, and the remarkable ability of farmers to unite and take ownership of cotton production. American cotton farmer’s ability to dominate is due to the combination of ingenuity, mechanization, agriculture research and command of the value chain. One must also not forget to factor in America’s history of free and cheap labor though slavery and sharecropping which gave the American cotton farmer a huge head start over foreign competition. Today, The U.S. government plays a major role in the farming industry. American cotton farmers have a large competitive advantage over their foreign counterpart due to government subsidies. Government subsidies guarantee US farmers a minimum of 72.24 cent per pound of cotton. This is almost double that of the global market for cotton, which in 2004, was at 38 cents per pound. The government also requires America based clothing factories to purchase a certain percent of their cotton from American farmers. In addition to subsidies, there are programs that ensure farmers against weather losses, specialized loans, and grants to help to farmers develop new technologies, all to ease the minds of farmers so they “don’t lose too much sleep”. In 2004, government support to farmers was about three times what The...
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...petition to the International Trade Commission requesting an investigation on the Chinese tire imports • Results from the investigation • 18th June 2009 Ø ITC and president Obama agreed on 3 years of years of duties on Chinese tires: q 35% in the first year q 30% in the second year q 25% in the thirds year Summary of the case: U.S. Actions • China’s appeal against U.S. tire tariffs • Tariffs imposed by China on U.S. imports Ø 105% Tariffs on U.S. Chickens (2010) Ø Substitute Airbus for Boeing ? Summary of the Case: China’s Retaliation ARGUMENTS FOR : ARGUMENTS AGAINST: ECONOMIC: • Protect the U.S. from unfair competition brought in by China • Protect tire industry workers in the U.S. • Stop dumping caused by low cost producers- China ECONOMIC: • Inflict economic damage on both countries • Loss of economic welfare (in the U.S.) Ø Higher prices Ø Lower consumer choice • Trade war POLITICAL REASONING : • One of the key reasons President Obama backed up the International Trade Commission was to keep the American labour unions content and gain their support during the elections. • Expected outcome of the protectionism policy applied Ø Predicted increase of 1,200 jobs on the tire-manufacturing sector Ø Theoretical expectation • Actual outcome on consumers Ø Higher prices for consumers q Prices of Chinese tire imports faced a 26% increase • Actual outcome on the labour market Ø President...
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...Domestic barriers in China China has experienced a surge in global integration over the last two decades, as indicated by the tremendous growth in its international exports and imports. However, recent studies claim that domestic market integration within China is low and has worsened over the same period. Anecdotal stories give us a glimpse of these barriers. To ensure demand for its domestic automobile company, Shanghai's municipal government only allowed cars produced by its local joint venture _rm with Volkswagen to operate in the taxi _eet (Li, Qiu, Sun, 2003). Another well-known story recounts how the local government of Shenzhen prohibited sales of newspaper from Guangzhou, its neighboring city, in order to retain revenues from the sales of its own local state-owned newspaper (Gilley, 2001). Aside from these examples, these types of domestic trade barriers include physical barriers, outright prohibition through administrative decree, financial benefits for firms selling local goods, fees on firms selling nonlocal goods, local purchasing quotas, commercial registration licenses, “technical certification”. As best put it by Naughton (2000), _Local government don't blockage their borders or impose tariffs. But their pervasive influence over the local regulatory apparatus enables them to impose significant non-tariff barriers to outside firms that can significantly increase the costs of trade and cross-border investment. Whatever form these barriers take, it is clear...
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