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Intersting article from the financial times The other side of China’s success story, It says that a lot of the growth in the inner provinces is due to goverment deficiet spending which cannot keep growing forever. Makes me think about where the money is coming from for all the road and skyscraper construction in my little city…
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The other side of China’s success storyPublished: January 19 2003 20:40 | Last Updated: January 19 2003 20:40
The $52.7bn in foreign direct investment that China attracted last year is an impressive sum. It is almost certainly enough to make the country the world’s biggest recipient of FDI in 2002. And with much of it spent on developing China’s export sector, the investment underlines just how much the country is now an important part of the global economy.
The sum may not be quite as big as the headline figure. Practices such as “round-tripping”, where Chinese companies send money offshore then re- import it as “foreign” capital to qualify for tax breaks and other investment privileges, almost certainly lead to some domestic investment being relabelled as foreign.
But such claims cannot - and should not - detract from China’s achievement in pulling in the several hundred billion dollars of genuine FDI that has already arrived.
Barring unforeseen disasters, this flow will continue and increase. Manufacturing operations are expanding their presence. Intel, for example, plans to raise its current $200m commitment to $500m by the end of 2003. And China’s entry to the World Trade Organisation is allowing foreign business to buy significant stakes in large companies in sectors previously closed to them - hence HSBC Insurance’s announcement in October that it was spending $600m on a 10 per cent stake in Ping An Insurance, China’s second largest life assurer.
With many more such deals being lined up, talk of China’s annual FDI inflows rising to $100bn is anything but fanciful. But - and it is a big but - while FDI is doing a great job for China, especially at building the country into an export powerhouse, its impact is far from universal. Across huge swathes of the country it is having little impact.
Province-by-province figures for last year have yet to be released. But they are unlikely to be much different from 2001. That year, 50 per cent of all FDI went to just three locations - Guangdong province, next to Hong Kong, the city of Shanghai, and its neighbour, Jiangsu province. Most of the rest of the money went to other locations up and down the coast.
Inland, and indeed in some places along the coast, the flow was just a trickle. In 2001, Guizhou, China’s poorest province and home to nearly 40m people, attracted less than $30m. In such places, growth has largely been kept going by China’s other economic driver of the past half decade: government spending, especially on infrastructure and construction. These attempts to stimulate the economy have succeeded up to a point - national growth has remained above 7 per cent a year for the past several years. But, as Xiang Huaicheng, finance minister, warned last April, the government cannot continue to finance growth through deficit spending indefinitely.
When the tap is turned off, the impact along much of the coast will be offset by continuing foreign investment and export operations. But elsewhere, much of the country will find the going tough. In fact, many places already are. Thanks to the huge state-spending binge of the past five years, many second-tier cities, including many provincial capitals, have heavily over- invested in everything from near-empty highways and surplus bridges to speculative high-rise properties and grandiose multi-storey stations that dispatch a train or two a day.
They are also home to a big part of China’s surplus manufacturing capacity - again, much of it caused by over-investment. This has been a prime cause of the deflation that has plagued China since 1998. It has also created tens of thousands of money-losing companies propped up by bank loans - in turn adding to the bad debts of China’s banks, now standing at 40-50 per cent of all loans.”