Introduction

There is no doubt that part of People’s Republic of China (PRC)'s FDI inflows belongs to the return of the Chinese capital that has gone aboard escaping the foreign exchange control. The World Bank and other agencies and experts have estimated that the scale of this round tripping could be as high as a quarter of the total FDI inflows into PRC (see World Bank 2002). But the World Bank did not provide clear definition on round tripping FDI and did not explain its estimation method. This paper attempts to fill this gap in the literature by providing an estimation of the overall scale of PRC’s round tripping FDI with detailed description on the methods and assumptions. The paper also clarifies a few conceptual issues related to the different types of round tripping FDI and their measurement problems.

A useful study of PRC's round tripping FDI needs to have both the breath and depth that can capture and piece together the underlying real picture of the unique pattern of capital flows from the incomplete and imperfect statistics and existing theories. Because of the inconsistence and fragmentation of FDI statistics across different sources (for example, the Mainland PRC, Hong Kong, China SAR, and OECD countries) and the intrinsic secrecy nature of the round-tripping capital, it is almost impossible to obtain a direct and accurate measure on the scale of the round-tripping FDI. Hence, the results here should be viewed very much like a sketch of a suspect put forward by a detective who has attempted to piece together the available information about the suspect into a recognizable sketch. This rough sketch however could provide a very useful framework for more informed debates and research about many related policy issues.

The issue of PRC's round tripping FDI is important for policy makers in PRC, other countries as well as various international organizations. The prevailing view on PRC’s FDI is that PRC attracted too much of the global FDI flows at the costs of other developing economies. Hence, PRC's currency should be revaluated to restore the international balance in capital flows and competitiveness. The findings of this study, however, do not seem to support this prevailing view. The estimations here indicate that the round-tripping FDI in PRC are likely in the range of 30% to 50%, much higher than the previous estimation of about a quarter by the World Bank.

The evidences suggest that a large part of the capital originally created in PRC has managed to go abroad and has stayed aboard waiting for opportunities to return back to PRC. On average the round tripping FDI, e.g. the returning Chinese capital, is about 20% to 30% of the capital flight of various estimations. The pattern of capital creation and movement uncovered here suggests that competition for FDI flows are not a zero-sum game. The FDI inflows are not simply a fix sum to be competed away among different countries. Instead, PRC’s experiences have shown that FDI inflows are probably endogenously determined by the capacity of the hosting countries to create new capital. When a developing economy like PRC is creating new capital, a significant part of the new capital is likely to find its way abroad through mis-invoicing in international trade, smuggling, and other channels of capital flight since the people who are creating the new capital have strong incentives to diversify domestic risks and to seek better protection of property rights. The accumulated capital flight then forms the base for sustained round tripping FDI back home when the opportunities to make profits and create new capital at home continue to exist.

In the case of PRC, Hong Kong, China SAR plays an important role in each of the three stages of capital's journey: (1) the original creation of new capital in PRC, (2) the capital flight out of PRC and (3) the round tripping FDI back to PRC. In the past two decades, about 40% to 60% of PRC’s FDI inflows were from Hong Kong, China according to PRC’s official report. However about half of Hong Kong, China’s FDI to PRC as reported by PRC can not be verified or confirmed from the related statistics collected in Hong Kong, China. Clearly Hong Kong, China is crucial in understanding PRC's round tripping capital flows.

Hong Kong, China is not alone in facilitating capital creation, capital flight, and the return of flight capital through round tripping FDI. The offshore financial centres, such as British Virgin Islands, Bermuda, and Cayman Islands, have been playing more and more important role, particularly in facilitating legitimate round tripping capital flows for the purpose of listing the Mainland PRC companies in Hong Kong, China and other overseas stock markets. The U.S., EU and other Asian economies are also important in facilitating capital flows across the Chinese borders through their close trade and investment relations with PRC.

The high level of round tripping FDI in PRC as shown in this study should not be interpreted as a problem of ineffective regulation in PRC since a large part of the round tripping capital is actually creating new value for capital as it moves across borders to get better financial services in Hong Kong, China or other overseas financial centres. This is very much similar to the substance of global FDI activities, including cross-border merges and acquisitions and cross-border debt financing. PRC's weak domestic financial system means that the FDI has effectively become an important channel of project financing which is separated from the domestic financial system but is closely related to the external financial systems in Hong Kong, China and other developed economies. As PRC relaxes its capital control in the future, it is expected that the part of round tripping with the purpose of getting around the government regulation so as to enjoy preferential tax policy or better protection of property rights would decline while the part of round tripping with the purpose of getting better financial services such as listing in Hong Kong, China’s stock markets would rise. On the whole, PRC’s round tripping FDI is more of a statistics interpretation problem than a substantive constraint or drawback for PRC and the global economy.

Section 2 of this paper will review briefly the existing literature and data sources related to round-tripping FDI in PRC. Section 3 will provide some background information on the recent development in PRC and global FDI flows. This section is useful in putting PRC's FDI into a proper international and comparative perspective and is highly relevant for the later discussion on the causes, determinants and implications of PRC's round tripping FDI. Section 4 examines the patterns of FDI flows in PRC, focusing particularly on those issues related to identifying the nature and scale of round tripping FDI in PRC. Section 5 discusses briefly the incentives, causes, determinants of the round tripping FDI. Based on the discussions in the previous sections, section 6 provides a method of estimating the scale of PRC's round tripping FDI based on the gaps in reported FDI statistics by PRC and the source region. Section 7 concludes the paper by discussing the policy implications.

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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