China Is Rising - Outlook On Chinese Economy

It's been happening rapidly and it's been happening (with the odd hiccup) consistently. For 10 years the PRC has been growing at a break neck pace at something like 10 per cent per annum. Fishing villages like Shenzhen (the closest city in the PRC bordering Hong Kong) have become cities and cities like Shanghai have become mega cities with the immense Pudong financial district rising from paddy fields in a decade. Urban legend? It has been said that at one point half the world's cranes were to be found in Shanghai.

This article considers how China is managing this growth through its own programme of Foreign Direct Investment (FDI) and the implications of its success or failure in steering the behemoth economy it is creating. We will also look at the frameworks being used for the flow of FDI into China.

In an effort to cool growth and prevent overheating in the economy, The People's Bank of China had required banks in the PRC to increase funds on reserve to nine per cent by 15 November 2006. This followed two similar orders to increase deposits in June and July 2006. Estimates suggest that each 0.5 per cent rise in the funds banks keep on deposit freezes 150 billion Renminbi.

China's scrabble for natural resources to fuel its growth is important. Over the past decade China has worked assiduously at building relationships with resource rich countries, particularly those that are nonaligned or have specific anti-US or socialist policies like Venezuela, in keeping with China's political hue.

Evidence of this can be found at the recent summit of African nations - called the Forum on China-Africa Cooperation - which included 48 African nations devoted to developing increasingly stronger economic relationships. As many as 2,500 deals were on the table at the summit for oil and other resources. Trade with African nations has grown to US$40 billion and Chinese investment has poured into copper mines and oil fields, helping to boost African economies. As the world's second largest consumer of oil behind the United States, China last year imported 38.4 million tons of oil from Africa.

The World Bank has pledged US$2.3bn to sub-Saharan African nations this year yet this pales in comparison next to the US$8.1bn (according to World Bank figures) Beijing has committed in 2006 to Nigeria, Angola and Mozambique alone. This places China in the position of becoming the number one lender to African nations.

Some in the West have criticised China for pouring money into African treasuries while ignoring human rights and environmental concerns on the continent. China, however, has rejected such criticism, saying it abides by a policy of non-intervention and it makes its loans without restrictions which perturbs many international aid organizations and the World Bank which try to place restrictions on their loans. These restrictions usually involve issues with corruption or the environment.

Investor enthusiasm for China and India (noted in the latest (2005) FDI Confidence Index) is at an all-time high, with roughly 45 per cent of global investors more upbeat about China and India compared to last year. China achieved its highest ever score in the latest index and has held top spot since 2002.

The FDI gap is likely to widen as China continues to implement its WTO accession commitments that involve extensive liberalisation of the service sector until the year 2007.

At some point as or after this article goes to press, China will surpass US$1 trillion in reserves. With the immense wealth comes increasing responsibility as China takes on a part in not only steering its own economy but that of the world. Within the next 20 years, China could rival the US as one the world's economic navigators.

The US$1 trillion reserves represent a fivefold increase since 2001 and present great challenges to China whilst simultaneously reflecting the successes of its policies. On the downside China now has an imbalanced economy, driven too much by exports - which keep adding to those reserves - and not enough by domestic consumers.

China is trying to manage the transition to a more consumer-driven economy through policies aimed at stimulating domestic spending which include two, week-long national holidays.

Research presented by academics in a paper at the Sixth Asian Economic Panel Meeting has shown that FDI to China is positively related to levels of FDI that the other main contenders for investment in neighbouring Asian and South East Asian countries receive. However, the increases are not shown to be proportionate.

While both the level of China's foreign direct investment and the levels of foreign direct investments of Asian economies are increasing together, an increase in China's investment is associated with a decline in the shares of foreign direct investment of the Asian economies. The self-perpetuating affect of China's continued share of FDI growth in Asia is not the most important determinant governing FDI into Asian countries. Policy variables under the control of the nations concerned, such as lower corporate taxes and higher degrees of openness play a larger role in attracting investment. Lower levels of corruption also play a role in leading to higher levels of FDI.

About The Author-- The Zetland Financial Group provides the offshore investor with fiduciary Services, investment management and corporate advisory services, offering personal service and professional advice with total confidentiality.

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