In: Economics
Discuss about the impacts of FDI on China's economy
There are a lot of impacts of FDI on China's economy
Plz write some important impacts of FDI. What is more, plz give me some datas of the impacts of FDI on China's economy
Since late 1978, with the implementation of market-oriented economicreform, inward foreign direct investment (FDI) has been encouraged in China. As a consequence, foreign reforrms have been attracted by the huge domestic market and pool of relatively well-educated, low-cost labour, which has made China one of the most attractive destinations for FDI in the world. By the end of 2013, China had attracted a total of US$1.4 trillion in FDI inows, making it the largest FDI recipient in the developing world.
What are the impacts of FDI on China’s economic growth? It is expected that FDI brings into a host country a package of capital and frm-specifc intangible assets and, as a result, it plays a positive role in the economic development process of a host country (Caves 1996; Dunning 1993; Markusen and Venables 1999; UNCTAD 1999, 2004). In the past three decades of remarkable economic growth, FDI has contributed greatly to China’s economy in terms of capital formation, employment creation and export expansion (Chen 2011). The main interest in this chapter is to investigate and identify empirically how FDI has contributed to China’s regional economic growth. Using a panel dataset containing China’s 30 provinces1 over the period 1987– 2010, this chapter estimates an augmented growth model in which direct effects (for example, raising output and productivity through capital augmentation and technological progress) and indirect effects (for example, improving productivity and effciency through spillover effects on the local economy) of FDI on China’s regional economic growth are analysed.lets try to examines the impacts of FDI on China’s regional economic growth by using the full sample of China’s 30 provinces. Then the chapter examines how the local economic and technological conditions of host provinces infuence the extent to which FDI contributes to local economic growth by subdividing China’s 30 provinces intodifferent province groups based on their economic and technological conditions. Let's try to finds that FDI has contributed to China’s economic growth directly through capital augmentation and technological progress and indirectly through knowledge spillovers on the local economy. And also try to find that the contribution of FDI to economic growth is infuenced by local economic and technological conditions. FDI has a stronger impact on economic growth through capital augmentation and technological progress in the developed provinces than in the less-developed provinces. While FDI has a positive and significant impact on economic growth through knowledge spillovers in the developed provinces, the positive knowledge spillovers of FDI on economic growth are absent in the less-developed provinces.
This topic makes three contributions to the literature on the impacts of FDI on China’s economic growth. First, the empirical specifications used in this chapter not only include direct effects of FDI, but also enable us to examine the spillover effects of FDI on China’s regional economic growth. Second, by subdividing provinces into different groups in the estimations we can examine empirically how provincial differences in economic and technological conditions affect the extent to which the spillover efects of FDI contribute to provincial economic growth. Third, this chapter extends the period of the panel dataset to 2010, which is the most recent period in existing studies.
Theoretical explanations of how FDI contributes to developing host countries’ economic growth and presents a brief literature review on how the economic and technological conditions of a recipient economy influence the extent to whichFDI contributes to economic growth. The third section sets out the framework of analysis and specifies the empirical model. The fourth section describes the variables and the data. The fifth section presents the results from the regressions and explains the estimation results. The final section provides the conclusion and policy implications
FDI has played an important role in China’s economic development and export success. According to the Ministry of Commerce (MOFCOM), foreign invested enterprises account for over half of China's exports and imports; they provide for 30% of Chinese industrial output, and generate 22% of industrial profits while employing only 10% of labor – because of their high productivity. Evidence on technology spillovers is more limited, but industries with higher FDI seem to have higher productivity increases than other industries, suggesting a positive effect. Importantly, foreign investment has catalyzed China’s economic reform. Together, these contributions have supported China in maintaining a record-high 10 percent growth rate during most of the 1980-2010 period.
China has been successful in mobilizing inward Foreign Direct Investment (FDI). Attracted by the country’s investment opportunities and by its sheer size and growing domestic market, China received about 20 percent of all FDI to developing countries over the last 10 years and over $100 billion in 2008. In terms of share of GDP and investment, FDI accounted for some 2.5 percent of GDP on average over the last five years. While this may appear to be low it can be easily explained by the overall size of the economy: China is the third largest economy of the world, just behind Japan and the United States of America.
FDI Impacts on China’s Economy
Because of its unique nature and its importance, the economic
literature and research attributes significant economic effects to
FDI. During the past two decades, China has attracted huge amounts
of FDI inflows and FDI firms have become an important element of
the Chinese economy. What FDI is doing, how FDI
firms are behaving, and the impacts of FDI on China’s domestic
economy have been a growing subject of discussion and analysis by
policy makers as well as academic scholars in China and abroad. The
following part of the paper summarises the main findings of the
research conducted on this subject under the OECD/MOFTEC
co-operation programme on this important subject. Some policy
implications are presented in the concluding section of the
synthesis note. impact of FDI on China’s international trade Since
1980, China’s foreign trade has registered an impressive growth.
Between 1980 and 1998, its share
in world trade trebled, from less than 1 per cent to more than 3
per cent. The openness of China’s
economy, measured by the ratio of foreign trade to GDP increased
from 12 per cent to 34 per cent. Thebconclusions of the research
are convergent: FDI has been at the core of China’s foreign trade
expansion. Furthermore, it has been a decisive factor in China’s
involvement in the international segmentation of the
production process known as “globalisation”. Their conclusions are
based on the following empirical evidence.
China’s comparative advantages
As predicted by economic theory, China’s major structural strengths
in international trade have been concentrated in a limited number
of labour intensive manufacturing products: leather and shoes,
apparel,vmiscellaneous manufactured products (toys, sports goods,
…). Its major structural weaknesses have been
located in capital and technology intensive goods: machinery,
engines, intermediate textile products, and plastics. Ten sectors
in which China had its biggest comparative advantage accounted for
the bulk of China’s exports (58 per cent), and ten sectors in which
it had its biggest comparative disadvantages accounted for the bulk
of its imports (42 per cent). This reflect large disparities in
factor endowments with
China’s foreign trading partners (the EU-15, the United States,
Japan and the four new industrialised economies (Hong-Kong, Taiwan,
South Korea and Singapore) and the existence of major
inter-sectoral complementarities. In the same vein, China had
positive net exports only in labour intensive products both in its
trade with Asia and with the rest of the world.
China’s specialisation patterns have nevertheless evolved. Its
comparative advantages in some of the more traditional sectors
(clothing and knitwear, carpets) levelled off in the nineties,
while new comparative advantages emerged and others diminished. In
particular, China built up new comparative advantages in computer
equipment, consumer electronics, electrical apparatus and household
electrical appliances through a very rapid increase in exports. At
the same time it gave up its comparative advantage in
threebsectors, among which crude and refined oil.
These shifts in specialisation also changed China’s position in
world trade. While in 1997 China still held the largest market
shares in traditional industries (between 12.5 per cent and 22 per
cent of world exports of leather products, clothing, carpets,
miscellaneous manufacturing), it increased its market shares in the
most rapidly expanding world markets (telecommunication equipment,
computer equipment, electrical apparatus and equipment).
There is little doubt that China has the trade structure of a
developing country. However, inter-sectoral trade specialisations
seem more deeply entrenched than is the case of most other
developing Asian countries. This can be attributed to China’s size
and large resources of low-cost labour which make it possible to
sustain a continuous expansion of labour intensive exports. In
other words, China has been able
to diversify its exports of labour intensive products and establish
competitive positions in rapidly expanding markets, thus succeeding
in sustaining a rapid export growth.
Increased participation in the international segmentation of
production
The study tested the pattern of China’s revealed comparative
advantage according to stages of production
and increased participation in the international segmentation of
production.
Looking at exports, it was found that final goods (consumer goods
and capital goods) doubled their share between 1980 and 1997 to
reach the level of 55 per cent. Exports of consumer goods accounted
for 38 percent of exports or twice the share of capital goods (18
per cent) in 1997. However, while clothing was still the most
important export item, exports in consumer electronics, domestic
electrical appliances and instruments were the most dynamic
consumer goods. Capital goods took the lead in export growth in the
nineties. This change was mainly driven by electrical equipment and
apparatus, computer equipment, telecommunications equipment. In
short, within the final goods category, exports tended to shift
from consumer goods to equipment goods, and from one chain of
production (textile industry) to another chain of production
(electric and electronic industry).
The relative importance of intermediate goods and basic
manufactured products in exports did not change much (around 8-10
per cent). By contrast, the dependence of China’s exports on
primary products dropped .
According to CEPII’s eight stages of production classification:
primary products, basic manufactured, intermediate goods, equipment
goods, mixed products, consumer goods and others.sharply, from
almost 40 per cent in 1980 to around 7 per cent in 1997. Products
responsible for the relative contraction of primary exports were
crude oil and non-food agricultural products.
On the import side, productive goods (intermediate goods and
basic manufacturing, capital goods) held a dominant share with 60
per cent of total imports in 1997. Intermediate products accounted
for the largest part of Chinese imports by stage of production in
1997 (28 per cent). Moreover, they increased slightly
faster than overall imports since 1980. Textile products made up
more than one third of imports in intermediate goods, but since
1990 electronic components have been the most dynamic export sector
and reached more than 10 per cent of intermediate imports in 1997.
Capital/equipment goods represented the
second most important import category after intermediate goods or
almost one fourth of imports in 1997.
Machinery was the most important import item in this category while
electrical apparatus and equipment, telecommunication equipment and
computers were the fastest growing import sectors.
Thus the analysis of the pattern of comparative advantage by stage
of production shows that, in 1997, China’s weaknesses were heavily
concentrated in intermediate products and to a lesser extent in
capital goods. China’s strengths were concentrated in consumer
goods. This pattern of specialisation indicates that
China may be involved in the international segmentation of the
production process and specialised in the assembly and
transformation of imported intermediate goods for export. This
specialisation in assembling operations has been well entrenched in
the textile industry and has risen rapidly in more
technologically
advanced industries.
The impact on China’s trade growth
Over the 1992-1998 period China’s foreign trade expanded rapidly:
in dollar terms, exports more than doubled and imports increased by
75 per cent.
The distribution of exports by category of firm suggests that
foreign invested enterprises (FIEs) have been responsible for
almost all the visible improvement in China’s export performance.
From 1992 to 1998, total Chinese exports rose from 2.3 per cent to
3.4 per cent of world exports. Over the same period, FIEs in
China increased their share from 0.5 per cent to 1.5 per cent of
such exports. Domestic firms registered some gains in the first
half of the nineties but lost ground afterwards and in 1998 they
held the same share as in 1992 (1.9 per cent).
On the import side China’s share of world trade rose to 2.6 per
cent between 1993 and 1996 and then declined slightly to 2.5 per
cent in 1998, as a result of a slowing down domestic demand. FIEs
led import growth and their share in world imports doubled from 0.7
per cent to 1.4 per cent, overtaking that of domestic firms. Impact
studies underline that host country policy has an important policy
influence on the
links between foreign affiliates and the rest of the economy. Like
other Asian economies, China has followed a trade policy which has
combined export promotion together with relatively strong import
protection measures. With regard to FIEs, China has applied a
selective policy which has included preferential treatments (tariff
and fiscal exemptions) in export oriented sectors and sectors
targeted for import substitution policies, but also applied severe
constraints in other sectors (limited access to the domestic
market). The result has been the establishment of a dualistic trade
regime for domestic and
foreign firms.
) The role of FIEs in processing trade
What is the root of FIEs’ outstanding export performance? Research
attributes China’s outstanding export performance to FIEs’
international processing activities. In the nineties, processing
trade increased much
faster than ordinary trade, as it benefited from tariff exemptions
granted to intermediate products used in the production of exports.
These concessionary imports amounted to 49 per cent of China’s
total imports in 1998 (against 39 per cent in 1992) and exports
associated with concessionary imports reached 57 per cent
of total exports in 1998 (47 per cent in 1992). FIEs took a major
part in the rapid growth of processing trade. FIEs were responsible
for 70 per cent of China’s imports for processing and for 66 per
cent of its processed exports. Over the period 1994-1998 FIE
processing activities were by far the most dynamic component of
China’s trade and they represented almost 38 per cent of Chinese
total exports and 34 per cent of imports in 1998 (against 25 and 24
per cent respectively in 1994).
The main underlying assumption is that the overwhelming share of
processing activities in foreign
affiliates’ trade reflects their role as a production base for
parent companies which have relocated segments of production in
China. Foreign firms, motivated by cost considerations, have
transferred the downstream, labour intensive stages of production
in China. China has thus become integrated in the
international
segmentation of the production process. Most imported inputs for
processing come from Asian countries, suggesting that Asian firms
have taken a major part in this transfer of production capacities
in order to maintain their competitiveness in world markets.
The data suggests that a dividing line separates imports from Asian
countries on the one hand, and United States and the EU’s imports
on the other. From Asian countries, FIEs located in China imported
mainly intermediate goods to be processed and re-exported. A large
part of these imports corresponded to the supply of inputs from
parent firms to their affiliates and can thus be characterised as
intra-firm trade.
(These firms include American and European affiliates in China
which source their inputs in the region, thus contributing to the
rise in imports from Asian countries.) Looking at the commodity
composition, it was found that electrical equipment, plastics and
textile products form the bulk of processing imports from Asian
countries. This suggests that the share of Asian countries in
China’s imports does not reflect their
capacity to enter the domestic market but the fact that China had
become a production base relying on supplies of intermediate goods
from the region.
In contrast with FIE imports from Asia, however, FIE imports from
the United States and the EU-15
concern mostly goods to be used or consumed domestically. This
means that the foreign firms concerned follow a strategy aimed at
the local market. FIEs’ imports of capital goods from Europe have
accounted for an overwhelming share of China’s imports of
machinery, electrical machinery and vehicles. The importance of
machinery and equipment in China’s imports from the EU (36 per
cent) can thus be directly
connected with FDI, confirming that European FDI activities in
China have been oriented towards relatively capital-intensive
projects. FIEs had only a relatively small share of China’s imports
from the United States, whose commodity composition is more biased
towards arms’ length trade (aircraft, fertilisers, agricultural
products).
FIE exports to major markets were also heavily determined by
processing trade. FIE processed exports were geared towards four
main destinations: in 1997, the EU-15 received 12 per cent of these
exports, Japan 20 per cent, the United States 24 per cent, and Hong
Kong 25 per cent, most of which was to be
redirected towards the United States and Europe. China’s top export
sectors to the EU-15, to the United States and to Japan, were thus
heavily dependant on FIE processed goods; the only remarkable
exception was the clothing industry, as most of its exports
remained in the hand of Chinese firms.
FIE processing activities have led to bilateral trade patterns
which help illustrate the reorganisation of production which has
taken place in Asia (with China becoming an assembly base for
finished products for the supply of world markets). For instance,
foreign affiliates in China recorded a large surplus from their
processing trade with the EU and the United States. They had a
relatively balanced processing trade with
Japan, an indication that intra-firm trade played an important part
in Japan-China two-way trade. However, they had a large processing
trade deficit with Taiwan and South Korea. Their processing trade
surplus with Hong Kong was also the result of bilateral trade flows
passing through the territory. If these flows were
attributed to actual partners, the existing bilateral imbalances
would be even more accentuated: it would increase China’s surplus
with the United States and the EU and its deficit with Taiwan and
South Korea.
) The comparative trading performance of FIE firms
The research found similarities as well as differences in FIE firms
and China’s domestic firms’ export dependence. First, both China’s
domestic firms and FIE firms relatively concentrate their exports
in labour
intensive manufactured products. This implies that both China’s
domestic firms and FIE firms are making the most of China’s
comparative advantage in labour intensive manufactured products in
international trade. Second, the exports of some traditional
capital intensive products have a relatively important
position in the total exports of manufactured products of China’s
domestic firms, while the exports of some fast growing technology
intensive products are playing increasing roles in the total
exports of manufactured products of FIE firms.
These differences reflect in fact differences in the industrial
structure of FIEs and domestic firms. First, the industrial
structure of FIE firms is more biased towards labour intensive
industries compared to China’s domestic firms. Second, FIE firms
are relatively more concentrated in the newly developing and fast
growing export-oriented industries than China’s domestic
firms.
It thus appears that foreign firms have strengthened – and will
continue – to raise China’s comparative advantage in labour
intensive industries and increase China’s labour intensive product
exports. FIE firms
have also improved and will further improve China’s export
structure from the one which is composed of exports of labour
intensive products plus traditional capital intensive products to
the one which is characterised by the combination of the exports of
labour intensive products and technology intensive products.
Looking at exports in the manufacturing sector, FIE firms do show
an apparent tendency to export significantly more the China’s
domestic firms. On average nearly 39 per cent of the FIE firms’
sales were exported, while only less than 10 per cent of the
Chinese domestic firms’ sales were exported. The difference in the
export behaviour between FIE firms and China’s domestic firms is
even more significant
in labour intensive industries and in technology intensive
industries. For the FIE firms, the export to sales ratio was 46.21
per cent in labour intensive industries and 45.29 per cent in
technology intensive industries, while for the Chinese domestic
firms, the export to sales ratio was only 14.5 per cent in labour
intensive
industries and 7.82 per cent in technology intensive industries.
The sharp difference between FIE firms and Chinese domestic firms
in export behaviour confirms that FIE firms in China are more
export-orientated than China’s domestic firms.
FIE firms have dominated most major manufactured exports from
China. In 1995, FIE firms accounted for 51.19 per cent of China’s
total manufactured exports. In terms of the industry groups of
factor intensity,
FIE firms accounted for 51.4 per cent of China’s total labour
intensive manufactured exports and for 69.75 per cent of China’s
total technology intensive manufactured exports. In the industries
of leather & fur products, furniture manufacturing, printing
& recording, plastic products and instruments & meters
the
shares of FIE firms’ exports ranged from 71.84 per cent to 78.98
per cent of the industries’ total exports.
The most significant percentage is in the electronics &
telecommunication equipment industry, in which the share of FIE
firms’ exports accounted for 94.45 per cent of the industry’s total
exports. Research suggests that the participation of FIE firms in
China’s manufacturing industries, particularly in
the export-oriented industries, has, and will continue to raise
productive efficiency and international competitiveness in China’s
manufacturing industries in general and in the export-oriented
industries in
particular. But the linkage effects of these export-oriented FIE
firms might not be as great as their impressive export shares might
suggest. This is because, as already noted in section (3), FIE
firms’ exports are almost exclusively confined to assembled and
processed products using mainly imported materials or
components. In 1998 as much as 85.45 per cent of total FIE firms’
exports, or 69.18 billion US dollars, were for assembled and
processed products. This may imply that the linkage effects,
especially the backward linkage effects, that FIE firms may have on
indigenous firms, may be quite limited.
Another explanation is that FDI in China’s manufacturing industries is still in its very early stages and mainly involved in the activities making use of China’s unlimited supply of low cost labour.
) Building Dynamic Specialisation
The following factors provide a good explanation of how processing
trade accentuated China's
specialisation in labour intensive stages of production. China’s
leading export sectors are heavily dependant on FIE processing
activities which accounted in 1997 for more than 60 per cent of its
exports in electrical machinery, machinery, footwear, instruments;
the only remarkable exceptions were the more
traditional export sectors (textile, iron & steel, fuels). FIE
processing trade had also been the major factor behind the
diversification in favour of more technologically advanced
products, with rapidly expanding markets (electrical machinery,
instruments).
Processing trade has accelerated structural changes in China’s
trade. Foreign direct investment, driven by cost considerations,
has induced China to build up comparative advantages in new
manufacturing sectors,
based on an in-depth specialisation along the production process.
China has specialised in the downstream segments of production
(assembly) in which it has a comparative advantage, relying on
imports of intermediate goods and components. As far as the
imported intermediate products incorporate high technology, they
may be a channel for technology transfer into the Chinese
manufacturing industry.
) Domestic penetration of FIEs
FIE firms have contributed significantly to China’s manufactured
exports, a large portion of FIE firms’ sales has actually entered
China’s domestic markets. In 1995, of the 954.19 billion yuan sales
from the FIE firms, 61.37 per cent or 585.54 billion yuan were sold
to China’s domestic markets. This represents a share of 15.37 per
cent of China’s markets for domestically produced manufactured
products. Domestic sales of FIE firms concentrated in transport
equipment (12.68 per cent of FIE firms’ total domestic sales),
electronics and telecommunication equipment (10.29 per cent), food
processing (7.81 per cent), electrical
machinery and equipment (6.73 per cent), textiles (6.68 per cent)
and chemical materials and products (6 per cent). Together the
above six industries accounted for 50.19 per cent of FIE firms’
total domestic sales.
In some manufactured product markets, FIE firms have already gained
prominent domestic market shares.
In 1995, FIE firms’ domestic market shares in China reached 40.13
per cent in electronics &
telecommunication equipment, 36.12 per cent in clothing & other
fibre products, 31.37 per cent in leather & fur products, 29.25
per cent in food manufacturing, 26.19 per cent in instrument &
meters, 25.83 per cent in beveragemanufacturing and 24.87 per cent
in transport equipment industries respectively. The market shares
of FIE firms are expected to rise as more and more large MNEs enter
into China’s markets.
Unlike the early arrivals of small and medium-sized and labour
intensive firms from Hong Kong and Taiwan, the new entrants of
large MNEs, equipped with modern technologies, mainly target
China’s huge and under-exploited domestic markets. Therefore, the
presence of FIE firms has forced and will continue to
press China’s domestic firms to improve their performance in order
to prevent their market shares from shrinking even further. Such
impacts of FDI on China’s domestic economy may be much more
profound and important than just a means of contributing to China’s
export growth.
) Rising Local Content
Since 1994, processing trade has been responsible for a growing
part of China’s trade surplus. The ratio of exports after
processing to import for processing steadily increased. This
processing trade surplus can be seen as an indicator of the value
added in China. Apart from the appreciation of the yuan, this
result may
be attributed to the growing integration of the production process
in the mainland, which has included more stages of production and
related services (packaging, marketing) which used to be made
outside the mainland. The declining role of Hong Kong in China’s
exports, also means that products made in China are now more
directly sold in world markets. It would appear, however, that
domestic firms’ processing trade generates relatively more apparent
value added than FIEs. Domestic firms source more naturally
inputs in the domestic market. FIEs have generally a higher
propensity to import intermediate goods.
Foreign firms may tend to concentrate their activities in the most
simple manufacturing industries and in the most basic production
stages. It is also possible that the practice of intra-firm pricing
may lead to an underestimation of local content.
) FIE Export Competitiveness and Exchange Rate Policy
One interesting finding is that processing trade may have isolated
China from exchange rate fluctuation as a large part of exports and
imports from such trade are denominated in foreign currency. During
the Asian financial crisis, the Chinese currency strongly
appreciated, in real terms, against most Asian currencies and
this raised the fear that China would have to devalue or would
incur a large trade deficit. In fact, while “ordinary” exports
declined by 5 per cent in 1998, FIE processing exports continued to
rise (+8 per cent).
To a large extent therefore the resilience of Chinese exports
during this period can be traced back to processing trade and
especially to FIEs processing trade.
) Domestic firms have lagged behind
Since 1992 domestic firm trade has clearly lagged behind foreign
firm trade. There is no evidence, however, that domestic firms have
suffered from the competition of FIEs which would have displaced
their exports. This results from the fact that domestic and foreign
firms have followed divergent specialisation
trends.
Duties exemptions also seem to have played a role in the difference
in export competitiveness to China’s duties exemptions in favour of
foreign firms. Virtually all imports of machinery by FIEs benefited
from duty exemptions in 1997, as they corresponded to initial
equity investment or to assembly trade. Imports of machinery by
FIEs represented almost 70 per cent of the total amount of
machinery and equipment
imported by China in 1997. This means that less than one third of
imported equipment was directed to domestic (wholly Chinese) firms,
which in turn accounted for more than 80 per cent of domestic
industrial production. This unequal access to imported equipment
has certainly been a contributing factor in domestic
firms’ performance.
Regional Disparities have increased
The research suggests that FDI has strongly influenced the economic
openness of the different Chinese regions as the presence of FIEs
in provincial economies largely determined their involvement in
foreign trade. FDI has been heavily concentrated in the coastal
provinces. Foreign trade concentration in these regions has grown
even faster. From 1992 to 1997, inland provinces have received less
than one fifth of
FDI and in 1997 they were responsible for less than 10 per cent of
foreign trade (12 per cent in 1992). The rapid expansion of export
oriented industries based on imported inputs had accelerated the
integration of coastal economies in international trade and
production networks but this may have been achieved at the
expense of backward and forward linkages with the rest of the
economy and especially at the expenses of inland economies.
(12) The impact on China’s balance of payments
As noted previously, China’s FDI policy has enabled FIE enterprises
to become the major force in China’s
foreign trade development. FIE enterprises account for 48 per cent
of the aggregate growth of China’s exports since 1981. The robust
export growth rates of FIE enterprises’ exports has resulted in an
annual
foreign exchange surplus for FIE enterprises in general since 1986.
In recent years, FIE enterprises have been able to maintain their
foreign exchange balance with a surplus in foreign trade. All these
factors have
contributed to the improvement of China’s balance of payments and
the increase of China’s foreign exchange reserves. Two factors will
be crucial in the future for the maintenance of this situation,
namely the trade behaviour of FIE enterprises and the size of FDI
inflows. Whether China will be able to maintain a balance of
payments surplus will depend on whether enterprises, especially FIE
enterprises, continue to expand exports and whether China will
continue to absorb large FDI inflows.
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