Title: People's Republic of China's Round-Tripping FDI: Scale, Causes and Implications
Reference Number: 1137
Publication Date: July 2004
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Author(s):

Xiao Geng
The University of Hong Kong

Abstract:

There is no doubt that part of People's Republic of China (PRC)'s FDI inflows belongs to the return of the Chinese capital that has gone aboard escaping the foreign exchange control. This paper shows a large part of the capital originally created in PRC has managed to go abroad and has stayed aboard waiting for opportunities to return back to PRC. On average the round tripping FDI, e.g. the returning Chinese capital, is about 20% to 30% of the capital flight of various estimations. The pattern of capital creation and movement uncovered here suggests that competition for FDI flows are not a zero-sum game. The FDI inflows are not simply a fix sum to be competed away among different countries. Instead, PRC's experiences have shown that FDI inflows are probably endogenously determined by the capacity of the hosting countries to create new capital. When a developing economy like PRC is creating new capital, a significant part of the new capital is likely to find its way abroad through mis-invoicing in international trade, smuggling, and other channels of capital flight since the people who are creating the new capital have strong incentives to diversity domestic risks and to seek better protection of property rights. The accumulated capital flight then forms the base for sustained round tripping FDI back home when the opportunities to make profits and create new capital at home continue to exist.

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Last modified: 06/22/2005