Chinese way of winning the FDI Race

I was always wondering how come China gets so much more FDI than India?

FDI or Foreign Direct Investment is the money invested in a country by foreign companies. Foreign companies might invest money in another country either to expand their existing facilities there, or to acquire/merge with existing companies there or to start new branches there. For instance Hyundai might invest money in India to open a new car manufacturing facility. Microsoft might invest in India to acquire an Indian software company. Intel or IBM might invest in India to expand their India operations and so on.

As per the statistics for 2006 China says it has received about 69 billion USD in the form of FDI.

India on the other hand says that in 2006 it has received about 17 billion USD as FDI.

Given the fact that China undertook economic reforms almost two decades before India did, it is no surprise that China might be ahead of India, at least as of now. Because its not even two decades since India started its reforms.

But there is definitely a large difference between 17 and 69! Is India still so behind? I felt something fishy here, given the way Chinese communist government is known to mislead the public and world. Today there is not much real difference between India and China in terms of FDI opportunities. India is a democracy, China is a communist country. India has the world’s largest youth population and hence the largest potential market.

China might have an advantage over infrastructure as of now, but India is definitely catching up. The rapidly growing satellite townships are playing a keyrole in de-congesting Indian cities. Massive investments have been made in reshaping the infrastructure of major cities in India. I myself have been experiencing the world class roads that have been created around cities like Bangalore. India has the advantage of its all pervading English skills too.

Given these facts what exactly might be the reason for such a vast difference between India and China in terms of FDI? Is China really so much more attractive than India for FDI? Why would companies prefer a communist country than a democracy? Has a Stronger Rupee got to do anything with this?

FDI Considerations:

Now, lets get down straight into the facts.

When India announces its FDI amount, it considers ONLY equity capital as FDI

When China announces its FDI amount, it strictly includes all items mentioned by IMF as FDI components and even more items!!! See below.

What China and India consider as FDI. See the huge difference

So China “considers” all items (from equity capital up to non-competition fee ) mentioned by IMF as FDI. OK, Not really bad. But India considers only one item in that list!

Now there are two more items left, which are NOT considered by IMF as FDI, they are Imported Equipment and Round tripping! China even considers these as FDI!

Imported Equipments as FDI:

China is NOT satisfied with IMF definition (which itself many economists consider to contain non-FDI things like loans). The Communist government of China even considers imported equipments as FDI. India NEVER does that mistake. We dont want to fool ourselves. Do we? If I pay money and get a Boeing-747 from US, can I consider it as an investment made on me by Boeing?

Not only that, China even considers round-tripping as FDI!

What is round tripping?

It is a financial mechanism followed by some companies to fool the general public by showing false investments and earnings. Suppose I want to show a false increase in the sales of my refrigerators. So I will sell you my 1 million refrigerators agreeing to buy back all the 1 million refrigerators from you at the same price.

What do I gain? An increase in the number of sales which I can project to the market to fool people into believing that I am one of the largest sellers of refrigerators!

Now how does China use round tripping to show an increased FDI? By rerouting domestic investments through places like Hong kong and Taiwan! So if a Chinese company wants to invest within China, instead of directly investing within China, it will reroute the investment through Hong kong or Taiwan and the government will show it as FDI!! Since most Chinese companies are government run, this becomes even more easy to manage.

A clue for this round tripping is that China is the leading investor in Hong-kong with over 1/3 of Hong-kong’s FDI coming from China! And not surprisingly Hong-kong is the largest investor of FDI in China, about 30-40% !!!

So now you understand how ‘China and Hong Kong ranked No. 1 and No. 2 in attracting foreign direct investment in Asia in 2004, according to ‘World Investment Report 2005?.
Invest and re-invest! Simple round tripping :)

Also, the second highest FDI investor in China is the British-Virgin Islands which Chinese companies use to open “offshore” arms, and then reinvest into China from there!! There is NO real business done by these Chinese companies in the British-Virgin islands, its just used to show a FDI investment! Why British-Virgin islands? Because this small British overseas territory offers excellent features for offshore companies which includes tax exemptions and non-disclosure of ownership! So one can use it to project more FDI by round tripping investment from there!

Now the startling revelation is that, according to many estimates, about 30-50% of Chinese FDI itself is due to round-tripping! Round tripping contributed to 25% of FDI in China in 1992 and to about 50% in 2000! So now you got the secret behind this amazing growth rate? Invest local money, project it as global money ;)

See what Financial express says about Chinese round tripping, “A large amount of Chinese black money is recycled through Hong Kong and sent back to the mainland as FDI. Round-tripping in fact accounts for one-half of China’s FDI inflows, which thus reduces the reported level (of FDI in China) from $40 bn to $20 bn in 2000.“ ! It also says that the Indian FDI is overly underestimated and is “not in sync with ground reality”

Now coming back to the “actual” inward fund flows as FDI, more than 60% of the fund flows of China are from the Chinese who are staying outside China, especially in US. Where as in terms of actual inward fund flows in India, ONLY 9% is from the Indians who are resident outside India! Over 70% of fund flows inside India are from foreign companies!

See the Real difference between India and China.
“The biggest difference between the two countries is the robustness and strength of the Indian financial system and the poor health of this system in China. The entire banking system in India sits on Bad Debts of only USD 17 Billion. The NPAs in India have been going down year after year in India for almost a decade. After the securitisation act banks in India have been putting the squeeze on defaulters.

The figure of bad debts for China as per J D power is over USD 450 billion. Most of this lending must be to PLA and its various outfits making recovery extremely difficult. That is roughly half of the Chinese GDP. Creation of 6/8 lane roads does not take much money. If India was to invest 10 billion each into its 7-8 major cities, the skylines would look just like Shangai or Beijing.

The Chinese NPAs are a bubble waiting to collapse and explode on the faces of the banks lending into China. An implosion would see a stagnant decade or two on the lines of the Japanese economy and will wipe out billions of dollars of assets from the balance sheets of the western bankers“

Summary

Now let me ask the question again:
Why does China get so much more FDI than India? Why? Why?

Bcoz,

India hugely under reports its FDI by largely not following the International definition of FDI at all!

China on the other hand falsely over reports its FDI by including imported equipments and round tripping, which account for more than half of its FDI.

Moral

We can fool some people all the time
We can also fool all people for some time
But can we fool all people all the time?