Capital outflows
China's emergence as a major player on world capital markets has been overshadowed by the country's growth in foreign trade and in the inflows of foreign direct investment. The International Monetary Fund ranks China as the world's eighth largest supplier of capital on world markets, and its importance prompted a study by Mr David Wall of London University's School of Oriental and African Studies and the Royal Institute of International Affairs.
There are no reliable data on China's outward foreign investment, but even by conservative estimates the numbers are large. Based largely on data published by China's Ministry of Foreign Trade and Economic Cooperation (Moftec), the study concludes that between 1989 and 1995 gross long-term outflows of capital totalled US$120bn, almost half of the US$241bn long-term inflows in the same period. During this same time, outflows of foreign direct investment were US$15bn, outward portfolio investment US$2bn and 'errors and omissions' ? often a reflection of long-term capital flight ? was a massive US$55bn.
The Chinese government has done much to encourage outflows of capital because of the many economic benefits that result, including access to raw materials and proprietary technology, increased foreign exchange earnings and spreading the activities of the country's major enterprises.
The investment of China's enterprises is concentrated in Hong Kong, Australia, Canada and the US. Hong Kong investment tends to be small scale with much of it in the trade and service sectors, while Australia and Canada tend to be a source of raw materials and the US of proprietary technology.
With central government approval, several large state-owned enterprises have turned themselves into multinational conglomerates. Some of these companies are using their multinational status to raise capital on world markets to invest in China, although the net flow is still substantially negative. A well-known example is Citic Australia.
In conclusion, the survey regards the acquisition of productive assets in other countries as a means of expanding China's world economic power. "Perhaps it should be invited to join in the OECD discussions on the establishment of codes of practice for firms involved in foreign direct investment," says Wall. "It already accounts for more such investment than several of the OECD countries involved in those discussions."
On a less positive note, a recent Financial Times report noted that at least one third of Chinese investment abroad is unprofitable. It highlighted the recent closure of China Agribusiness Development Trust and Investment which reportedly ran up big losses in its Hong Kong, Latin American and Thai investments. Other projects which soured include Shougang's loss-making Peruvian iron-ore mine, for which it paid US$120m, and Cities blunder in purchasing a US steel mill in Delaware.
Moftec is now investigating investment abroad in an attempt to curb unauthorised transfers, squandering of state assets and corruption. It is focusing on Hong Kong, where mainland controlled entities are believed to have injected between US$40bn and US$50bn ? only US$326m of which was ministry