Commenting on Foreign Direct Investments in China
Researching the most recent foreign direct investments (FDI) statistics in China provides the investor with either a pessimistic or an optimistic outlook, depending on whether the statistical data is being reported from China or the United States.
Only scarce statistical information about FDI in China is available, with the majority of data coming from China. The information is evaluated by a limited number of researchers and analysts, and the media brings nothing new to the table.
From inside China, the Chinese regime’s Ministry of Commerce stated that between January and October 2012, newly approved FDI amounted to 20,021 investments, a decrease of 10.49 percent when compared to the same period in 2011. The value of the FDI was $91.7 billion, a decrease of 3.45 percent.
When the above FDIs were broken down by region, a total of 15,852 new firms were established by investors from 10 Asian countries, including Hong Kong, Macao and Taiwan, a decrease of 12.22 percent year-on-year. Investors from the United States invested in 1,128 new firms, a year-on-year decrease of 6.39 percent. A total of 1,418 firms were formed by investors from the European Union, a 2.75 percent year-on-year increase.
“FDI statistics provided by the Ministry of Commerce showed FDI inflows slowing down and growth dropping into negative territory. This slowdown was interpreted by many to demonstrate eroding confidence in the Chinese market, thus validating hard landing worries,” according to a Jan. 4 report on the Rhodium Group website.
While the Chinese regime’s Ministry of Commerce published a deceleration of FDI into China, China’s central bank, the People’s Bank of China (PBOC), seems to indicate just the opposite in its inflow of foreign capital into the Chinese economy for third quarter 2012. By using the third quarter balance of payments numbers, the PBOC used a different kind of method from which one can deduce the FDI inflow.
“Statistics from the central bank accounting for those flows show a much more bullish FDI picture, with positive growth from January through September,” according to the Rhodium Group report.
The Ministry of Commerce’s data only reflects new capital inflow and doesn’t account for money earned and reinvested by a foreign firm in China, which would affect the FDI data positively. The foreign capital inflow and outflow data does not account for reinvestment of profits, as they had not left the country and thus could improve the FDI.
“FDI figures published by the Ministry of Commerce only capture new projects from overseas, but they neglect reinvested earnings from foreign companies already operating in China,” the Rhodium Group report states.
FDI data coming out of China, as demonstrated by the Rhodium Group, is not comparable to data collected and published outside of China, and thus any analysis should be viewed with a grain of salt.
“The differences in FDI data serve as a[n] important reminder that China’s economic statistics are still not in line with international standards,” according to the Rhodium Group report.
Statistics can be interpreted differently, depending on how they are compiled and presented, so forecasts and actual numbers could be on opposite ends of the spectrum.
“These inconsistencies allow bulls and bears alike to pick the data points that best fit their narrative. Statistics on cross-border capital flows in particular are often not comparable with similar indicators elsewhere,” the Rhodium Group cautions.
Chinese Approach to Investments
Economists suggest that the Chinese regime follows its own version of the East Asian Economic Model, a model that although assumed to be similar throughout Northeast and Southeast Asia, is not the same across Asian countries because of different political systems and interventions by the respective governments.
“The Chinese version of the model relies on protectionism, heavy promotion of exports by subsidies and an undervalued exchange rate and a State/Communist Party directed over-allocation of resources to investment including real estate and infrastructure projects,” according to a Dec. 12, 2012, discussion on The Big Picture blog.
The Big Picture discussion suggests that the Chinese regime’s growth model has outlived its usefulness, and the country no longer has the earning potential as in earlier days, stating, “The Chinese model has reached a dead end of diminishing marginal returns on capital.”
Investing in Chinese Stocks
“Observers have noted with some wonderment that the Shanghai A Share Index has gone down for three straight years,” according to The Big Picture discussion.
The Shanghai A Share Index has moved downward since 2009 because most of the stock in that index are state-owned enterprises (SOE). SOEs are not market-oriented firms, but instead follow the Chinese regime’s directives, live on subsidies from the state, and are not chastised for faulty decision making.
The Shanghai A-Share index “tracks the daily price performance of all A-shares listed on the Shanghai Stock Exchange that are restricted to local investors and qualified institutional foreign investors. The index was developed with a base value of 100 on December 19, 1990,” according to the Bloomberg website.
Firms that operate in China and have listed their stock on U.S. stock exchanges are at risk of having to delist from the stock exchanges, as the U.S. Securities and Exchange Commission (SEC) has charged the accounting firms that audit their financial wherewithal with violating the SEC Act and Sarbanes-Oxley Act.
The firms charged are: BDO China Dahua Co. Ltd., Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited.
These auditing firms refuse to provide the auditing work papers needed to evaluate the truth of the audited financial statements. Should the auditing firms comply with the SEC request, they would be in violation of the Chinese regime’s national security law, and they would rather violate SEC requirements than go against the Chinese state’s edict.
It is not that the SEC is involved in blackballing Chinese-based companies. “The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers. … The agency has deregistered the securities of nearly 50 companies and filed fraud cases involving more than 40 foreign issuers and executives,” according to a Dec. 3, 2012, SEC announcement.
Pitfalls of Investing in China
“China has not yet completed its transition from rule of man to rule of law, and recourse to China’s court system often is not effective. Even more than in domestic business transactions, business strategies should be designed with an eye to minimizing the risk of disputes,” the US China Business Solutions website states.
Discussed extensively by market analysts and researchers, it is no secret that corruption in China is not the exception, but the norm, which does affect foreign investors. The problem is that the Chinese regime controls all facets of business life, and its officials want a piece of the pie, according to a May 2012 article on the Huffington Post website.
“Corruption is embedded in China’s unique approach to economic and political governance. … Corruption and China’s failure to consistently enforce the rule of law is undermining its economic and social progress,” suggests the Huffington Post article, quoting George Washington University’s Susan Ariel Aaronson.