On Some Characteristics of Foreign Direct Investment in China

In this paper we analyze foreign direct investment (FDI) in China from several points of view. After putting the subject into an historical context, we use time series to illustrate the main trends of capital inflows. Our main finding is that the significant growth of FDI inflows since the beginning of the 1990s can be attributed to two factors: first, the strengthening trust in the irreversibility of the reform process, second, the gradually opening domestic market. The paper also deals with two specific, and very important issues: the so called round-tripping capital, and role of off-shore areas in FDI inflows. We show that these phenomena are strongly linked to each other, and based upon the different handling of domestic and foreign enterprises by the government. Another special feature we try to understand is the large volume of FDI compared to portfolio investments. According to our explanation this is a consequence of the relative backwardness of the Chinese financial system compared to that of in advanced economies, which makes FDI a much safer way of financing than the use of the underdeveloped Chinese capital markets.