Question

Direct foreign investment by China in other countries expanded rapidly for 10 years from 2007, but fell significantly in 2017.   Discuss the reasons for the decline in 2017. Did the decline continue or was 2017 just a temporary downturn? From a Chinese perspective, what are the pros and cons of outbound DFI.

Consider the acquisition in 2016 of GE Appliances acquired by Haier, a Chinese company. What are the advantages/disadvantages to both China and the U.S.?

Has China invested in Puerto Rico What type of investment?

Answer 1

Rapid economic growth in the developing countries as well as strong recovery after the great financial crisis in the developed economies, and a gradual slowdown in economic growth in the domestic economy led many Chinese investors to scout for better investment opportunities across the world which caused a significant rally in external foreign investment. However, the slowing economy and stress in banking sector caused one of the biggest Chinese stock market crash in 2014 when many investors withdrew their financial investments from China. This caused a large fall in foreign exchange reserves. A stagnant export sector also caused to fall in foreign exchange reserves.

To stop further fall in foreign exchange reserves, the Chinese government put various restrictions on outflow of capital which led to a large fall in external investment from China to other countries in 2017. The new government regulation has only allowed external foreign investment in strategic sectors according to the priority of the Chinese economy and its objectives. Earlier the Chinese conglomerates invested in sectors such as entertainment, luxury real estate, sports etc. The external investments in these sectors are now discouraged.

The decline in external flow of capital has more or less stayed constant as per the policy of the Chinese government.

The pros of external investments are earning opportunities in fastest growing sectors across the countries around the world as well as opportunity of capturing of market share in the world. The cons are that the Chinese economy is more integrated in terms of business cycles in the world which could impact the foreign exchange reserves as well as exchange rate negatively leading to higher instability of the financial markets.

Chinese acquisition of GE Appliances provides it advantages such as greater market share in the world, especially in the US, as well as higher technological solutions. The US's disadvantage could be the loss of a major private sector company which could have earned and invested in the US. Now, the profit earnings from GE Appliances operations in the US and the world could be repatriated back to China.

A Chinese legal firm had announced in 2017 to invest $200 million in Puerto Rico in building China-themed resorts and other such recreation facilities in the country.