No big money exit from China

The decline of FDI is a worldwide trend. According to UNCTAD figures, in the first half of 2012 global foreign direct investment inflows reached $668 billion, a decline of 8 percent compared with the same period in 2011. There was steep drop in capital to the United States and a moderate decline in flows to the EU. The slow and bumpy recovery of the global economy, weak global demand and elevated risks related to regulatory policy changes continue to reinforce the wait-and-see attitude of many transnational companies toward investing abroad.

In recent years, China's overseas investment has grown rapidly. According to figures from the Ministry of Commerce, or MOFCOM, in the first half of 2012, China's overseas investment grew more rapidly than FDI. These statistics show that such normal overseas investment causes a decline in foreign exchange reserves.

The SAFE figures may be more convincing. In the first half of this year, China's cross-border payments increased 24 percent from a year ago. Of the total, overseas direct investment grew by 74 percent, while capital withdrawal such as withdrawal of FDI and securities investment and remittance of investment income grew by just 15 percent, meaning that most of China's "capital flight" is for investment abroad.

Certainly there is capital flight in China, but the volume is small. Huge fortunes seized from illegal activities such as corruption, bribery, smuggling and tax evasions are a major source of capital flight.

Given China's strict approval on overseas investment, some companies and individuals seek to transfer or retain their capital abroad without approval with the aim of making investments. Some other companies transfer funds abroad and then bring them back to China as foreign investments in order to enjoy favorable policies.

Wu Xianghong, an independent economics commentator, says capital flight has not yet become a trend in China, at least for now. Because of QE3, the US dollar faces depreciation in the short term, and currencies such as the renminbi are appreciating. This has to some extent curbed depreciation of the renminbi and capital outflows from China.

Wu says QE3 is an indefinite blank check issued by the US government to expand the dollar supply. Therefore in the next six to 12 months, the dollar supply will be eased. During this period, Chinese authorities should be concerned about asset appreciation caused by the pouring of dollar assets into China, instead of capital flight.

Liu Yuanchun, vice dean of the School of Economics at Renmin University of China, says although the Chinese economy is slowing, the economic situation is improving. Furthermore, the balance sheets of the real economy, the financial sector, the central and local governments as well as overseas investment and the foreign trade sector indicate that the Chinese economy is still healthy. Doomsday reports are unfounded.

Still attractive

According to figures released by the MOFCOM on Oct 19, in the first nine months this year, the number of newly approved foreign-invested enterprises and the amount of paid-in capital both declined, but in some sectors, foreign investment grew remarkably. For example, foreign investment in the retail and wholesale sectors rose by 6.7 percent, in the construction sector by 27.8 percent and in the information transmission, computer service and software industries by 32.8 percent.

Given that most foreign investment in the past was in manufacturing, the above-mentioned industries will be major growth points for China's paid-in capital.

However, most foreign investors still choose China's eastern regions as a top investment destination. From January to September, paid-in capital to the east amounted to $70.22 billion, accounting for 84.2 percent of the national total, while that to the central and western regions stood at $6.99 billion and $6.22 billion, or 8.4 percent and 7.4 percent respectively.