Did foreign firms tire of China? Or did China tire of FDI?

Same facts, two different interpretations.   One from the Wall Street Journal; another from the FT.

I tend to side with the FT.  China already saves more than it invests.   It doesn’t need access to foreign savings.  It does still want access to foreign technology …   tangible as well as intangible.  And no doubt it likes the political support that foreign partners provide during trade disputes.

But a bit more textile investment isn’t really going to make all that much difference to China’s future development.  And China – at least the folks at the central bank – question the wisdom of offering foreigners tax breaks and high returns when China is taking the funds they bring into China and socking them away in China’s reserves.

Those reserves pay 5.25 (on the short-end) and what, 5%, on the long-end.

If FDI in China earns a return of 15%, in aggregate, China is borrowing from borrows the world at 15% to buy Treasuries that earn 5%.  That isn’t obviously a good trade.   The intangibles -- the technology transfer, the political support -- have to worth a fair amount to make up for the negative carry.

It isn’t that FDI inflows to China have slowed – they are still in the $60-70b range.  It is more that China’s economy has grown in dollar terms so much that FDI is now a declining share of Chinese GDP.

And – hat tip to the New Economist – it is clear that China doesn’t just want to be destination for foreign direct investment.   China’s going global policy is meant to encourage Chinese outward FDI. 

Which makes sense.  The overarching fact about China’s economy is that it saves more than it needs for its own domestic investment – way more.  Even with an absurdly high level of domestic investment.    Rather than just offering foreigners 15% returns on their investment in China (just to be clear, 15% is a hypothetical number; I certainly don’t know if FDI in China in fact earns those kinds of returns),  it wants some of those returns for itself …  and rather than socking China’s excess savings away in central bank reserves, it wouldn’t mind owning some higher-yielding assets.

One caution, though.   The stock of FDI already in China is now large.   And judging from the absence of an income deficit in China’s balance of payments, I get the sense that a lot of firms are keeping their profits in China.     

And I am not sure that reinvested earnings are being counted properly in China’s balance of payments.  Technically, reinvested earnings show up as a payment back to the foreign investor (the parent company), and thus as a debit in the income balance of the current account.  And then those funds are sent back into China as a capital inflow to finance new FDI.   That is how reinvested earnings are handled conceptually.

But in practice, most countries don’t bother to keep good data on this.  If foreign firms are financing a lot of their current investment in China out of their reinvested earnings, the fall-off in FDI (as a share of Chinese GDP) may not be as pronounced as it seems.