All developing countries need foreign investment to develop. That is the plain truth.
But only the bigger, and more rapidly growing developing economies can attract foreign investment because those who own the money can see in those economies opportunities of quick returns, whether or not they truly exist.
That is why the bigger developing economies also tend to be exposed to a higher risk of financial turmoil if they somehow hold "too much" foreign investment - meaning more than what they could handle at a given time. Economic officials in Beijing may be asking themselves whether China will be the next economy to see some wild ups and downs of this sort.
In fact, concerns were expressed quite openly by officials at the recent high-level conferences on the monitoring and, if possible, management of the so-called hot money, or investment funds mainly seeking a profit from buying some assets only to sell them immediately.
Ironically, even though renminbi is still not a fully convertible currency, ways for the international hot money to enter China can be many. For the nation has long been in foreign trade and direct investment business despite its seemingly heavier exchange control than other economies. Money comes and goes in large volumes on a daily basis.
Even tourists and individual remittances, in their aggregate numbers, can affect the big picture to some extent.
As reflected by rumors and the media's society columns, four channels widely exist for the hot money to find its way into China. One channel consists of a variety of privately-raised funds, sometimes registered as small trading companies and at other times trusted to just a few individual managers, looking for assets to buy in China.
It is not difficult for investors to know that the renminbi will become fully convertible soon, and that at least for now, the mainstream economists in the West believe its valuation is lower than what it deserves. So once the renminbi does become fully convertible, for a short period of time, they can sell their China assets for a higher price.
The second channel exists in trade. Individual traders based in China may have easily accumulated some surplus from the immense export that the economy has generated in the last few years. Whether the traders are Chinese citizens does not really matter, so long as their main purpose for retaining the renminbi is short-term investment.
There can also be ways to keep more money inside China than it appears possible, such as by reporting higher-than-actual import figures and lower-than-actual export figures.
The third channel is the influx of foreign direct investment. Some of them, Chinese economists say, have directly entered the stock market. But there is no way to tell how many companies with foreign direct investment have indirectly spent their money on China stocks, and how much. While another thing to do to seek as almost much profit as stir-frying stocks is to take part in the Chinese urban development, in real estate and in public infrastructure, which frequently involve some of the world's largest projects.
The fourth channel is the most mysterious, because if one calculates, in a given time, by deducting China's trade surplus and foreign direct investment from its foreign currency reserve (or the total of foreign currencies that it has earned from converting the renminbi for their original holders), there is still a staggering amount.
In the first quarter, according to the official report, China's foreign currency reserve increased $153.9 billion, while its trade surplus was $41.4 billion, and foreign direct investment was $27.4 billion. The remaining $85.1 billion, or 55 percent, is still not accounted for. In comparison, for the whole year of 2007, the amount that was not accounted for totaled only $117 billion.
The first quarter's figure is bewildering considering a rise in the tax rate for foreign investment companies and in China's general labor cost. If the amount, and the trend it represents, can be defined entirely as the hot money, then not just officials in Beijing, but everybody should be concerned.
E-mail: younuo@chinadaily.com.cn
(China Daily 05/12/2008 page4)
