Conclusion

This paper estimates the scale of PRC's round tripping FDI and reviews the cause and implications of PRC's round tripping FDI. Based on the available statistical information, PRC's round tripping FDI ratio is likely to be around 40% or within the range of 30% to 50%. Our estimation is much higher than the previous estimates in the literature. The high level of round tripping FDI in PRC means that the FDI inflows to PRC are somehow exaggerated. PRC's capital flight is much larger than PRC's FDI inflows. PRC’s round tripping FDI is only about one quarter of PRC's capital flight. The high FDI inflows to PRC is largely a result of PRC’s capacity to create new capital and new profits and should not be regarded as a threat to other developing economies. PRC's strong capacity in creating new capital and its weak institutions in protecting property rights has led to sustained and large capital flight and round tripping FDI. But the pattern of capital flight and round tripping FDI is largely a statistic issue and has little implications on efficiency or resource allocation. As PRC continues in its effort to liberalize its economies, we are likely to see more and more cross-border capital flows in various forms, including capital flight and round tripping FDI. Our findings suggest that the control on PRC’s cross-border capital flows seems much looser than most people would believe. Since the FDI is one of the least flexible form of cross-border investment, the large scale of PRC's round tripping FDI suggests the existence of large amount of overseas Chinese capital.

This study is by itself useful as a building block for other studies relating to PRC and Asia economic dynamics. But it may have more direct implications on policies relating to PRC's exchange control, capital account liberalization, exchange rates, and PRC's international relations with US, Japan, and Asia. Due to space limitation this study focuses only on the round-tripping issue and leaves the policy implications and other related conceptual and empirical issues in the background for other or future studies.

* The author would like to thank John Weiss, Liu Ligang, Wing Thye Woo, Yongrok Cheong, a referee and seminar participants at ADBI for comments and suggestions. The statistical authorities in Hong Kong, China and Singapore provided excellent help on data. This research was partially supported by a grant from the University Grants Committee of the Hong Kong Special Administrative Region, China (Project No. AoE/H-05/99).

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1. kundan singh
   (posted 04 September 2006 / 10:10:07 AM)
   
   
   
   Thank you for this paper on round tripping. I am currently writing my masters thesis on the reasons for growth of fdi in China and India. Round tripping plays a part in the limitations of this research. The information has been useful in my thesis.
   
   Thank you
   
   Kundan Singh