Macroeconomic Factors Affecting Investment in China

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China launched its economic reforms and open door policy in 1978. A country having largest population, it attracts a pool of foreign investors towards its economy. Since then the economy went through a series of regulatory and political changes, global and domestic factors surrounded the economy, and it emerged as the second largest economy in the world registering a positive growth in its GDP consecutively for almost two decades. The economic situation prevailing globally requires the investors today to assess the opportunities across the globe and China looks to have favourable macroeconomic factors towards being a good investment opportunity.

Background of China’s Phenomenal Growth
Though China was proclaimed communist right after the 1949 revolution, it wasn’t until Deng Xiaoping came into power in 1976 that central planning was infused with capitalist thoughts and ideals. China’s modern growth truly began with Deng Xiaoping’s policies, which though way short of the Shock Therapy being advocated by Jeffery Sachs to the South American economies, was still a step towards a new form of communism – heavy state sponsored industrialization coupled with Foreign Direct Investments with a minimum of red tape. China’s vast resources along with the above policies have made it the fastest growing major economy in the world. The skewed distribution of resources has also meant that development has been concentrated along the coastal areas. China’s GDP, inflation, foreign direct investment, Currency Exchange rate, Balance of Payment (BOP) and unemployment rate are some of the macroeconomic factors that we will look into in this paper.

Foreign Direct Investment (FDI)
After the first wave of invasions by the Mongols in the 13th century, China has predominantly been a closed economy. Although its wealth surpassed that of the European cities of the Renaissance period like Venice and Vienna, it remained hidden from the rest of the world. This trend continued after Mao Zedong took power in 1949. FDIs into China in its current form began after Deng Xiaoping gradually eased FDI regulations, resulting in a large amount of money flowing into Chinese development projects. During this period American and Japanese companies began using China as their hub of manufacturing and most of the investments were made by them.

Macroeconomic Factors Affecting Investments in China

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[SAPM TERM PAPER] September 28, 2011

FOREIGN DIRECT INVESTMENT IN CHINA (1984-2004) 180 160 140 120 100 80 60 40 Contracted Utilized

0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Source of data: Ministry of Commerce of the People's Republic of China.

For the purposes of this paper, taking a look at the more recent trends in FDI inflows might be more useful. FOREIGN DIRECT INVESTMENT IN CHINA (1984-2004) 100 90 80 70 60 50 40 30 20 10 0 2005 2006 2007 2008


Source of data: Ministry of Commerce of the People's Republic of China .As

we can see, Chinese use of FDI peaked in the year 2008, at US$ 92.4 billion. Such remarkable progress was soon scuttled because of the 2008 recession and there has been a continuous exodus of funds from the Chinese economy. A single year has seen the largest exodus of capital in percentage terms since the Tiananmen Square massacre in the late 1980’s.

Macroeconomic Factors Affecting Investments in China

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[SAPM TERM PAPER] September 28, 2011


In 2010, FDI surpassed US$ 100 billion and it stood at US$ 105.74 billion at the end of the year. A few of the factors that have positively affected this flow of FDI into China are:   Thriving global economy and capital markets China’s attractiveness as a place for parking funds is directly related to its infrastructural development, resource availability, productivity etc. The level of maturation of these elements has made China an attractive option for investments. Also, availability...
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