From “ Going Out ” to “ Going Global ”

1. 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

2. Introduction Overheated report coverage Diplomatic policy? Facts and interpretation are confusing

3. Everybody Knows with wild imagination …

5. 1. Relevant researches • Reports by international organizations • Policy statement by Chinese government • M&A events reports • Data “digging”--BOP v.s. Approval

6. 2. Confusing Data & Concept • Flow & stock (annul & cumulative) • Data using “balance of payment” statistics • IMF, OECD, UNCTAD • Moftec-Ministry of commerce data • Demarcation:2002 onwards • Problem of present statistics • Statistics by region-Hong Kong puzzle

8. 3. Policy formation & background

11. Background of outflow fluctuations 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

12. 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 SOEsPoor performance—1/3 profitable enterprises, 2/3 running losesOver-sensitivity on China’s going global policy externally

13. 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%.

14. 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.

15. 2002 2003 2004 $2.7billion $2.85billion $3.62billion Increase by 5.5% Increase by 27% 3 years since WTO accession

16. 4, Enforceable policy measures—status quo “16th party congress” decision:Attract-in and going-out are equal important “Decision on reform of investment regime” 2003 Pending “Administrative regulation” Risk assessment for approval—11 items reduced to 5 Currency purchase quota—reviewed case by case Deposit for profit rebate—eliminated 2001 onward Decentralized 3.3 billion foreign currency purchase quota approval for investing abroad Self earned foreign currency—subject to approval Domestic foreign currency loan—subject to scrutiny Increase of investment amount (equity)—same as above approval Not possible to get cash

17. 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: $200million • State commission of development and reform: $30million upwards • Local 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. • Verification • Any change of the investment up to 20% of the original amount will be subject to re-approval.

18. 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 approval State 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.

19. --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 measures Positive factors: 112 bilateral investment protection agreements 87 agreements on avoiding double taxation MOU on labor cooperation Arrangement on social securities Negative factors: No investment law Yet to open capital account Currency control Bank loans availability Investment insurance

20. 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 applicants • Resources (48.2% in 2003) • Few R&D investment • Geographic distribution is changing positively (Asia attracts 80%) • Greenfield investment are mainly assembling operation • SOEs account for 43% in 2003

21. 6, Will China pour money globally? • Ministry of finance and PBOC concern • SOE governance • Per capita capital formation constraint • Less developed economy in term of GDP • Urbanization and employment challenge • Corruption sensitiveness • “Two ends” abroad • Currency appreciation incentive • Domestic market saturation