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Chinese Outward Investment in Hong Kong: Trends, Prospects and Policy Implications

01 Jul 1996-Research Papers in Economics (Organisation for Economic Co-operation and Development)-

Abstract: Over the last decade, China has been the leading investor among developing countries and Hong Kong is the foremost destination of Chinese investment. However, China’s outward investment has been grossly understated in official statistics due to avoidance of China’s foreign exchange controls. This paper tries to appraise those investment flows both quantitatively and qualitatively. It examines the many estimates of Chinese investment in Hong Kong, tracing their sources and bases of estimation. Most of these estimates are found to be crude guesses with very little empirical support. However, from the data on asset value and market capitalisation of listed Chinese companies in Hong Kong, and also from interviews with knowledgeable sources, it is possible to gauge the rough size of Chinese investment in Hong Kong. The paper also examines China’s economic presence in major sectors of the Hong Kong economy. It discusses the composition of Chinese investment by industry and by ownership ...
Topics: Investment (macroeconomics) (60%), China (58%)

Summary (2 min read)

Introduction

  • OECD DEVELOPMENT CENTRE Working Paper No. 113 (Formerly Technical Paper No. 113) CHINESE OUTWARD INVESTMENT IN HONG KONG: TRENDS, PROSPECTS AND POLICY IMPLICATIONS by Yun-Wing Sung Research programme on: Reform and Growth of Large Developing Countries July 1996 OCDE/GD(96)53 5.

SUMMARY

  • Over the last decade, China has been the leading investor among developing countries and Hong Kong is the foremost destination of Chinese investment.
  • China’s outward investment has been grossly understated in official statistics due to avoidance of China’s foreign exchange controls.
  • This paper tries to appraise those investment flows both quantitatively and qualitatively.
  • It examines the many estimates of Chinese investment in Hong Kong, tracing their sources and bases of estimation.
  • Most of these estimates are found to be crude guesses with very little empirical support.

PREFACE

  • While China has attracted much public attention as a host of foreign direct investment, less attention has been given to the fact that China has been the leading foreign investor among developing countries.
  • While Hong Kong has been the number one investor in China since the inauguration of China’s open policy in 1979, consistently accounting for roughly 60 per cent of the foreign investment in China, Chinese investment in Hong Kong had been less notable, as China was short of capital.
  • Rapid economic development in China changed the picture.
  • The BOC Group confined themselves to China-related banking business such as trade financing and handling remittances.
  • In a nutshell, China’s investments in Hong Kong were designed to handle, transport, and finance China’s exports to Hong Kong, and also to handle remittances and visitors.

II. CHINESE INVESTMENT IN HONG KONG: AN APPRAISAL

  • There are no accurate estimates of Chinese investment in Hong Kong.
  • The BOC Group is the second largest banking group in Hong Kong after the Hong Kong Bank Group.
  • The Hong Kong government started to survey external investment in Hong Kong manufacturing in 1984, and data on Chinese investment was provided from 1985 onwards, as China’s presence in Hong Kong manufacturing was too big to be ignored with the 1984 acquisition of Conic Investment, the largest electronics company in Hong Kong.
  • Before 1970, there were only three investments (Tien Chu Chemicals, Nanyang Tobacco and one other), but these were large and worth a total of US$311 million at original cost.
  • Organisation and Operation of Chinese Companies in Hong Kong Chinese companies are controlled by the Chinese government through the appointment of mainland cadres to top positions.

III. THE DETERMINANTS OF CHINESE INVESTMENT IN HONG KONG

  • In the open-door era, economic factors are paramount in Chinese investment in Hong Kong, though political factors are still important, as will be detailed later.
  • In 1992, the three traditional giants among Chinese companies in Hong Kong, namely, China Merchants, China Travel Service, and China Resources reorganised themselves into holding companies and became listed on Hong Kong’s stock exchange.
  • This implies that once a location acquires a comparative advantage in trade, the advantage feeds upon itself, and more trading firms will come making it even more efficient in trade (Sung 1991: 28-42).
  • More and more Chinese trading firms will establish themselves in Hong Kong with the continuing reform and decentralisation of China’s trading system.
  • 31 “To stabilise Hong Kong Chinese capital”, the NCNA has on several occasions asked the BOC to extend loans to friendly Hong Kong magnates in financial crises.

IV. PROBLEMS AND PROSPECTS

  • China’s investment in Hong Kong has been an important component of China’s open-door policy.
  • Though Chinese investment in Hong Kong benefits China and Hong Kong tremendously, there are also costs.
  • In the long run, the loss of control may be a blessing in disguise as planners are forced to abandon unworkable regulations and push on with reforms.
  • China’s myriad links with Hong Kong, cultivated partly as a result of Chinese investment in Hong Kong, led to a thriving black market in foreign exchange in China that forced planners to devalue and unify the exchange rate.
  • The estimate of Chinese investment in Hong Kong is likely to be biased downwards as there is an incentive for China’s local authorities and enterprises to establish unofficial subsidiaries in Hong Kong to evade controls on foreign trade and foreign exchange.

NOTES

  • 1 The author was also a speaker at that seminar, and has kept a copy of Mr. Xiangnan’s speech.
  • The balance sheet of the BOC covered its global operations, though its Hong Kong Branch is certainly the most important.
  • Table 36 from Review of Maritime Transport 1990, UNCTAD, U.N.: New York, 1991.
  • Some articles give the higher figure of 8 per cent which is exaggerated as they forgot to allow for the fact that China often owns a fraction of the shares.

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OECD DEVELOPMENT CENTRE
Working Paper No. 113
(Formerly Technical Paper No. 113)
CHINESE OUTWARD INVESTMENT
IN HONG KONG: TRENDS, PROSPECTS
AND POLICY IMPLICATIONS
by
Yun-Wing Sung
Research programme on:
Reform and Growth of Large Developing Countries
July 1996
OCDE/GD(96)53

5
TABLE OF CONTENTS
RÉSUMÉ ................................................................................................................ 7
SUMMARY ............................................................................................................ 7
PREFACE ............................................................................................................... 9
I. INTRODUCTION.................................................................................................. 11
II. CHINESE INVESTMENT IN HONG KONG: AN APPRAISAL................................. 13
III. THE DETERMINANTS OF CHINESE INVESTMENT IN HONG KONG .................. 25
IV. PROBLEMS AND PROSPECTS.......................................................................... 33
NOTES ................................................................................................................... 35
APPENDIX TABLES ................................................................................................ 37
BIBLIOGRAPHY ..................................................................................................... 45

6

7
RÉSUMÉ
Depuis une dizaine d’années, la Chine est le premier investisseur parmi les pays
en développement, et Hong Kong la première destination des investissements chinois.
Toutefois, en raison de la sous-déclaration liée à la fraude du contrôle des changes,
les statistiques officielles sous-estiment largement les flux d’investissement extérieur
de la Chine. Ce document technique tente d’évaluer le montant de ces flux
d’investissement et d’en décrire la nature.
Il recense les nombreuses estimations des investissements chinois vers Hong
Kong, en identifiant leurs sources, ainsi que les informations sur lesquelles elles sont
fondées. Il apparaît que la plupart de ces estimations sont des approximations
grossières, établies sur la base de données très incomplètes. Néanmoins, il est possible
d’évaluer le niveau de ces investissements d’après la valeur des actifs des entreprises
chinoises à Hong Kong et leur capitalisation boursière, ainsi que sur la base d’entretiens
avec des interlocuteurs informés. De plus, ce document évalue le poids des entreprises
chinoises dans l’économie de Hong Kong. Il analyse la répartition de leurs
investissements par secteur et selon la nature des investisseurs (ministères centraux,
gouvernements locaux ou provinciaux, organismes militaires). Enfin, il analyse les
déterminants économiques et politiques des flux d’investissement de la Chine vers
Hong Kong, et présente des conclusions de politique économique pour les deux
économies.
SUMMARY
Over the last decade, China has been the leading investor among developing
countries and Hong Kong is the foremost destination of Chinese investment. However,
China’s outward investment has been grossly understated in official statistics due to
avoidance of China’s foreign exchange controls. This paper tries to appraise those
investment flows both quantitatively and qualitatively.
It examines the many estimates of Chinese investment in Hong Kong, tracing
their sources and bases of estimation. Most of these estimates are found to be crude
guesses with very little empirical support. However, from the data on asset value and
market capitalisation of listed Chinese companies in Hong Kong, and also from
interviews with knowledgeable sources, it is possible to gauge the rough size of Chinese
investment in Hong Kong. The paper also examines China’s economic presence in
major sectors of the Hong Kong economy. It discusses the composition of Chinese
investment by industry and by ownership (central ministries, provincial and local
governments, and military-backed). The economic and political determinants of China’s
investment in Hong Kong are analysed, and the policy implications for Hong Kong
and China are examined.

8

Citations
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Abstract: ince 1978, when it opened its doors to the world,China has achieved spectacular success in attract-ing foreign direct investment In 2002, it sur-passed the US as the largest recipient of FDI in the worldHowever, investment has not been flowing in just onedirection According to the World Bank (1997), in themid-1990s China was the largest outward investor amongdeveloping countries and the eighth largest supplier ofoutward investment among all countries As

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Abstract: We investigate the empirical determinants of China’s outward direct investment (ODI). It is found that China’s investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that a) both market seeking and resources seeking motives drive China’s ODI, b) the Chinese exports to developing countries induce China’s ODI, c) China’s international reserves promote its ODI, and d) the Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources.

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Cites background from "Chinese Outward Investment in Hong ..."

  • ...Section 3 2 Sung (1996) and Wall (1997) are two early studies on China’s ODI....

    [...]


Journal ArticleDOI
Peter J. Buckley1, Adam R. Cross1, Hui Tan2, Liu Xin3  +1 moreInstitutions (3)
Abstract: A substantial body of literature has grown on the prominence of China as a recipient of foreign direct investment (FDI) and its consequences for national economic development and management practice (Branstetter and Lardy, 2006). By contrast, much less attention has been paid to China’s position as an FDI source. Given that China attracted an annual average FDI inflow of around US$29bn (or more than 7% of the world’s total) in the 1990s, but contributed less than US$2.5bn (around 0.6%) to global outflows, this is perhaps not surprising (UNCTAD, 2006). However, the sharp growth in Chinese outward direct investment (ODI) evident since 2002 (illustrated in Figure 7.1) combined with a number of recent high profile attempts by Chinese enterprises to acquire North American and European firms have brought into relief China’s rising status and potential as an investor nation. This potential is recognised in a recent UNCTAD survey of investment promotion agencies which predicts that China will become a ‘top three’source country for FDI before the end of 2008 (UNCTAD, 2005). It is also highlighted by the Director-General of UNIDO, Kandeh Yumkella, who suggests that annual flows of Chinese outbound investment are likely to reach US$60bn by 2010 (MOFCOM, 2006). If growth rates in Chinese ODI continue and these predictions are realised, China’s contribution to global FDI flows is likely to approximate current outflows of the leading industrialised countries.

294 citations


Journal ArticleDOI
Yin-Wong Cheung1, Xingwang Qian2Institutions (2)
Abstract: . We investigate the empirical determinants of China's outward direct investment (ODI). It is found that China's investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that: (i) both market-seeking and resource-seeking motives drive China's ODI; (ii) Chinese exports to developing countries induce China's ODI; (iii) China's international reserves promote its ODI; and (iv) Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources.

246 citations


References
More filters

Book
Yun-Wing Sung1Institutions (1)
29 Nov 1991
Abstract: 1. The open-door policy 2. The pivotal role of Hong Kong 3. The institutional setting 4. Evaluation of the open-door policy 5. Hong Kong as a financier 6. Hong Kong as a trading partner 7. Hong Kong as middleman 8. Summary and conclusions.

92 citations



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