Tuesday, February 19, 2008

Chinese FDI Doubles

by Richard York

The Chinese foreign direct investment more than doubled in the first month of the New Year from the figures recorded in the earlier year. The doubling of the FDI in China added more fuel to the fastest growing economy of the world and threatened overheating of the economy. Foreign cash has been flooding the Chinese economy due to its exponential growth. Expenditure by foreign companies and individuals rose to 110% which is about $11.2 billion, the Chinese Commerce Ministry stated on its website. In the year 2007 the investment climbed to 13.6% and stood at $74.8 billion.

The attractions for the foreign companies of China are many but the most important of them all includes cheap labor and a potential market of about 1.3 billion consumers. The Chinese government is striving hard to prevent cash inflows from investment and surpluses of trade that trigger inflation which is already nearing its 11 year record high. An economist at JPMorgan Chase and in Hong Kong, Wang Qian, said that this will mount pressure on the central bank of China to toughen its liquidity control. The central bank can resort to measures like selling more bills, absorb cash and increase the reserve needs of the lenders, the economist added.

The trade surplus of China shot to 23% in January from it’s earlier to about $19.5 billion. Cash inflows increased by as much as 18.9% which is the biggest rise since 20 months for China. In the year 2007 the People’s Bank of China hiked its interest rates for as many as seven times and it has also asked lenders to keep aside more deposits in the form of reserves for 11 times since the beginning of 2007. This made the ratio jump to 15% which is the highest ever. The Chinese central bank had also sold bills so that cash can be drained from the financial system and the loan growth of the banks can be capped.

Even though the Chinese government has put in place restrictions and higher taxes it has had little effect on investors from venturing in the fourth biggest economy of the world. China had declared in November that it was restricting foreign direct investment in the sector of important mineral resources and also in the industries which were heavy polluters and consumed energy and resources of the nation. The Chinese government is also diversifying the foreign direct investment. The government plans to divert investment from the eastern coastal towns to the less industrially developed regions that are located in the west and the center of the nation. The five year plan of China that extends to 2010 also stresses that there will be moving from assembly jobs to designing and industries that create high technology brands.

The government has planned to phase in 25% tax rate for the overseas companies. Earlier the foreign companies had to pay 15% tax and the rate for the local companies was almost 33%. However with the new government policy both, the foreign and the local businesses will be paying their taxes for the same rate.

 

 

 

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