The Existing Literature and Statistics

On round tripping the most recent and high profile study is the one by the World Bank, published in its "Global Development Finance 2002". The World Bank used a separate box with the title "Round-tripping of capital flows between PRC and Hong Kong, China" to highlight the importance of the round tripping FDI in PRC (see Box 2.3 on page 41 of World Bank 2002). The box contains a table and a graph. The table shows Hong Kong, China's FDI to PRC compared to PRC's total FDI inflow is as high as 50% in 1996, 42% in 1998, 40% in 1999, and 38% in 2000. The graph shows Hong Kong, China’s annual flow of FDI to PRC follows closely PRC’s net errors and omissions in its Balance and Payment. Since the net errors and omissions term is usually regarded as a proxy for capital flight. The graph gives the impression that PRC’s capital flight have come back to PRC by round tripping and in the form of Hong Kong, China's FDI to PRC.

The World Bank box article cited previous research (Lardy 1995, p. 1067; Harrold and Lal 1993, p.24) which estimated the scale of round tripping to be around one quarter of the total FDI. Then the box article concluded that the extent of this round tripping may have increased in the recent years referring to the box table and graph. Clearly the World Bank box article did not attempt to give a detailed estimation on the scale of round tripping. But many researchers and commentators have used the number 20% to 30% as a rough gauge on the scale of PRC’s round tripping FDI.

Although a number of previous researches highlighted the round tripping issue but the discussions focused on capital flight. (see for example, Sicular 1998, Adams 1993, Gunter 1996, Lardy 1995, Harrold and Lall 1993). Yasheng Huang in his 2003 book on "Selling China: FDI during the Reform Era" spent a whole section on round tripping FDI (see page 35 to 41) but his focus was on the implications without attempting to estimate the scale of the round tripping FDI. He is concerned about PRC's attracting too much FDI without using its own high and cheap savings first.

In PRC, a number of studies by local scholars on capital flights were published and they are important bases for studying the channels of capital flight and round-tripping (see for example articles listed in the Chinese references section).

For our current study, the most important source is the newly revamped calculation of Hong Kong, China's Balance of Payment statistics by the Hong Kong, China government statistics division. In recent years the Hong Kong, China government has put a lot of resources in estimating the statistics on external direct investment by implementing firm-level surveys. This study draws heavily on this source. PRC's Balance of Payment and FDI statistics are examined and compared with Hong Kong, China's to develop a useful framework on estimating the scale of PRC's round tripping FDI.

The United Nations Conference on Trade and Development provides extensive FDI statistics at both the aggregate and disaggregate level. This is the major data source that allows this study to check the FDI flows into PRC as reported by source countries. Unfortunately, many of PRC’s FDI source countries did not provide detailed statistics. Hence, our study can only explain about 70% of PRC's FDI with independent source country statistics.

The international setting of PRC's FDI also needs to be examined, particularly in relation to cross-border capital flows other than the FDI flows. This is because PRC's FDI is in a way a substitute for debt and portfolio financing (see McCauley 2002 and discussion on Hong Kong, China IPOs in section 6).

The US Treasury database on cross-border capital flows is also very useful in seeing PRC's capital outflows through the debt and equity markets. In particular, PRC has increased its purchases of USD bonds dramatically through both official and nonofficial channels. This can be regarded as a hedging strategy against large FDI inflows. It also reflects the role of cross-border capital flows in the protection of property rights. The Chinese government is protecting the property rights of foreign investors through improved business environments in PRC while the U.S.government is protecting the property rights of the Chinese investors in the U.S. bond markets.

The article by Frank R Gunter (Gunter 2004) provides detailed estimation of PRC's capital flight over the period 1984-2001 based on two standard approaches: the balance of payment measure pioneered by Cuddington 1986 and the residual measure used by BIS and World Bank. Gunter 2002 made a few important adjustment to the standard approaches by adjusting for the mis-invoicing, legitimate domestic foreign exchange banking assets, and gaps in reported bank debts by PRC and BIS reporting institutions. His comprehensive and recent estimation on PRC's capital flight provides a useful benchmark for us to compare our estimation of round tripping FDI with his estimation of capital flight.

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Comment(s)

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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