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Financial University under the Government of Russian Federation, Moscow, Russia, 2015

Финансовый Университет при Правительстве Российской Федерации, Москва, Россия, 2015

Investment potential of China

Инвестиционный потенциал Китая

Nikishina D.O., student of IFF 2-3Ch group

Никишина Д.О., студент группы МФФ 2-3К



Economics, in whole, is one of the four most important and significant sectors of social life which is influencing the whole world's way of life and all the people. However, economics itself is the vast variety of branches and separate fields of analysis within the borders of microeconomics and macroeconomics or for analyzing general economy or concrete national economies.

This work, in particular, is devoted to the research on investment potential of People's Republic of China.

The chosen topic is of great significance and urgency due to the fact that investment is accounted as one of the major factors of development of socioeconomic system of the country. Their scale, structure and efficiency determine the condition, perspectives and competitiveness level of national economy. Changes in quantitative correlations of investments influence the volume of production and employment of population, structural changes in the complex pertaining to national economy, development of branches and spheres of economy. Besides, dynamics of investment is the one most necessary fundamental parameter of production process which is reflecting the allocation of scarce resources between the current consumption and forming of the base for future growth.

Also, this topic is of great importance as analyzing investment potential of one of the most quickly developing countries of the world is able to influence development of other countries in the conditions of global instability that is being faced nowadays by the world economy. There is a need to forecast future changes and investment can highly contribute to this task, as it is the influential component of GDP which is able to influence such changes.

The economy of People's Republic of China is chosen as it is the rapidly developing country whose production and significant growth results happen to influence even the greater economies of the world while considering that China is the largest exporting economy of the world due to the latest ratings. Investment potential in this case is the foundation for the economic growth not only for China whose abilities to expand its own production and capital to higher levels with the help of accumulated investments are constantly growing. It is the foundation for growth also for other economies trading with China and wishing to diversify their wealth by investing in growing markets to get profitability in future. That's why, the complete analysis and full depiction of the current investment capabilities and conditions of the Chinese economy nowadays should be presented to satisfy the mentioned aims.

So, the main aim and purpose of this work can be summarized as to describe the investment connected conditions of the economy of People's Republic of China and future perspectives of its growth.

The structure of the work can be explained due to several main problems which were already seen in the contents. However, they are theory of investment, its functions, description of investment potential and its components, description of the Chinese economy, its overall philosophy, politics, credit ratings and tendencies, history, key economic indicators, conditions of FDI and ODI areas of investment and most attractive investment sectors.

Theoretical background and explanation in terms of scientific definitions Investment theory

The term investment comes from the latin word “investire” which means to array. [9] Within the borders of the centralized planning system of economy it is associated with investments of capital or the costs of the reproduction of the main funds , their extension and constant improvement. Initially investments were defined as a long-term investment of capital in different spheres of economy. Nowadays they are most commonly defined as funds, securities and other property including property rights and other rights possessing money value and invested in the objects of entrepreneurial or other activity in order to get profit or achieve another beneficial effect. [1] The most significant characteristics of investments are:

• the aims of investors are not always the same as the overall economic benefit;

• potential ability of investments to bring profit;

• the existence of the always individual term of investment;

• usage of different investment resources which are characterized by demand, supply and price;

• the existence of risk. [7]

Functions of investment spending

As an economic category, investments have several underlying functions and the development and growth of any economy is impossible. They forecast and predetermine the development of the economy, increase its productive potential. On a macro level they are responsible for the implementation of policy of expanded production, speeding-up of scientific and technological progress, enhancement of quality and providing competitiveness of domestic goods, structural reconstruction of economy and balanced development of all of its branches, as well as the social sphere, solving problems of national security, unemployment and environmental issues. [2]

On a micro level investments are necessary for normal functioning of an enterprise, stable financial condition and profit maximization.

Investment potential

By the definition which is accepted by the majority of economists, politicians and sociologists investment potential is the maximum possible aggregation of the owned resources accumulated as the result of previous economic activity of the object (here it is the country) which can be used for the provision of investment activity without the disruption of current economic activity of the object. For any nation of the world its investment potential is the plurality of resources previously created by the society or specially prepared for their introduction into the economic turnover within programs or projects of capital investments shown in the following diagram:



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Among the important components of investment potential, there should be most importantly mentioned national wealth. In a general definition, national wealth stands for not only material elements but also for people and their human capital. But for real macroeconomic application there is accepted that the costs of natural resources are not evident and cannot be fully estimated by means of expert valuations because there is still no universal way of measuring the real value of this part of national wealth. The only component of country's wealth that can be completely and truthfully estimated is fixed assets. And, this part will be fully revised in a computational-statistical part of this research work.

Fixed assets as the major component of investment potential

By the definition, fixed assets - are the produced assets used more than once or constantly during a long-term timeframe (but, not less than 1 year) for the production of goods, providing market and non-market services.[2]

The valuation of fixed assets' category is carried out by the means of the book value (term accepted in accounting, which is also referred to as carrying value or book cost [4].

So, the main aspects of consideration in further statistical research. These indicators for the chosen country include:

• Labour resources (and, general population, as well);

• Indicators of the economy's performance to illustrate the country's attractiveness for both domestic and foreign investors;

• Fixed assets of the country;

• Political regime;

• Recent tendencies and condition of political climate;

• Laws and economic regulations;

• Key investment sectors;

• Capital market development;

• Economic disparities;

• Technological outlook.

Analytical research of investment potential of China

In order to begin the detailed analysis of the current statistics and economic indicators concerning the economy of the selected country, the author, first of all, would like to introduce the overview of the nation and country, in whole, as the economy of any country in the world is dependent on its territory, geographic position, supply of natural and human resources, political regime, social stratification, the existing order of norms, overall philosophy, laws and regulations, customs and some other important for consideration traditions.

Country overview

China or the People's Republic of China is a socialistic (communistic) commonwealth in Eastern Asia. It is the largest commonwealth by the size of population (more than 1,35billion people) and the third one by size of territory. It is the great power - the candidate superstate, constant member of UNO Security Council, one of the leading space powers which possesses the largest military forces of the world and nuclear weapons.

From December 2014 it is the first economy of the world by GDP Real. [8]. In 2010 it left behind Japan and became the second world's economy by GDP Nominal. [5] China is the world's leader in industrial production including car manufacturing and consumer demand on them. The country also owns the greatest gold and exchange currency reserves.

China is the member of the majority of international organizations such as UNO, APEC, G20, WTO, SCO and BRICS. [22],[10],[14],[23],[20],[11].

Development process in recent years

In the 21st century the Chinese economy has demonstrated the double-digit gain during the period from 2003 to 2007 and in the post crisis 2010 when the country's GDP has increased by 10,4% [21]. In 2011 the economy started to slowly decrease and by the first quarter of 2014 the growth rate fell to 7,4%. From the 2008 and to present days (the period which can be called the most complicated economic conditions ever since the Great Depression) the steady rise of the Chinese economy could not become a coincidence. The government actively used the banking system for crediting large scale infrastructural objects and creating incentives for house-building.

All in all, there should not be forgotten that these were the basic economic conditions which contributed to such a significant growth. From the moment Chinese economy became opened towards the foreign sector in 1979, there has started the most prolonging, continuous and powerful economic growth in the history of mankind. Initially this rise occurred due to traditionally high level of savings which is typical for the population of Asian countries and then due to the considerable inflow of foreign investment.

Nowadays People's Republic of China bears the title of the second world's economy. After 2012 it is also considered to be the largest world's trading economy leaving behind even the USA with its enormous volume of goods traded. Besides, since 2003 China is on the second place by the oil import and since 2009 - the first place by the consumption of energy resources. The title of the world's greatest exporter was received 5 years ago when the share of the general world export reached 10,4%.

Economic indicators

China's GDP growth stood at 7.4 percent in 2014, averting a hard landing. The growth rate experienced a slowdown from 2013, mainly because of slower fixed asset investment growth and a challenging environment in the manufacturing sector. However, the speed of economic restructuring and upgrading increased. President Xi Jinping described this economic pattern as the `new normal'. [24]. This can be seen from the latest statistical data taken and reorganized from Bloomberg API which is also being shown for further years' estimates on the basis of the current numbers.

Indicator	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
Economic Activity
Real GDP (YoY%)	,6	9,2	0,6	1,5	,7	,7	,3	,9	,5	,2
Fixed Asset Investment (YoY%)	-	--	-	--	-	-	5,8	1,6	1	0,8
Industrial Production (YoY%)	-	--	-	--	-	-	,3	,2	,9	,8
Retail Sales (YoY%)	-	--	-	--	-	-	2	0,5	0,6	0,7
Price Indices
CPI (YoY%)	,9	50,7	,3	3,4	,7	,6		,6		,4
PPI (YoY%)	-	--	-	--	-	-	1,8	4,8	2,2	1,5
Unemployment (%)	,2	4,3	,1	4,1	,1	,1	,1	,1	,2	,3

Here YoY is used to measure YearOverYear performance as a percent change.

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The same information can be seen on the next page in the form of the graph for the dynamics of national income level during the latest 10 years. However, it does not mean slowdown of the Chinese economy, it proves the hardships of the world economic crisis of 2008 which while not having influenced the economy of China directly, slowed growth rates due to the fall in general investment flows around the world.

To summarize, the current condition of main economic indicators for the Chinese economy shows the good and rather stable level of economic growth (not depending on its fall, 7% can still be considered a sustainable high level) and typically higher than world average level of CPI change (most of the time it has been more than 2% while 2% is traditionally upholded by the majority of developed countries value of objective target inflation rate). But, it is allowable for the economy which is currently growing at fast levels such as the People's Republic of China.

Fixed Asset Investment

As it has already been said in the previous chapter fixed assets is, probably, the most significant element of investment potential of the country as it is the only component of country's wealth that can be completely and truthfully estimated compared to natural resources (while human resources will be declared for consideration in the next paragraph).

Here is the diagram of the recent changes of fixed asset investment trend for the country built on the basis of data from Chinese Government official statistics. [18]



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It is shown here that the monthly growth rate of accumulated fixed asset investment year-on year went through a continued decline in 2014, excluding a small 0.1 percentage point increase in June. This decline can be mainly explained due to real estate investment slowdown, which accounted for

18.9 percent of the total fixed asset investment in 2014. The downward trend was partly offset by investment in agriculture and investment, both of which had really high annual growth rates above 20 percent in 2014.

Investment from the private sector grew by 18.1 percent in 2014, 2.4 percentage points higher than the overall fixed asset investment growth rate. This brought its share of total fixed asset investment up from 63 percent in 2013 to 64.1 percent in 2014, indicating that the private sector is becoming more active than the stateowned sector.

Foreign direct investment and key investment sectors

FDI or foreign direct investment is another major indicator reflecting the current investment attractiveness of the commonwealth. From the definition, it is the form of participation of foreign capital in the realization of investment projects on the territory country-recipient of investments.

In other words, it is long-term capital investment of foreign investor into productive, trade or other commercial entities with an aim of profit maximization. [12]

In the methodology IMF that annually estimates volumes of FDI on the international level, it is said that FI can be called direct only if they imply buying of not less than 10% share in authorized capital of commercial organization on the territory of government-recipient and if this share allows investor or his representative to have strategic influence on invested into entities (including partly or full control over them). [15]

Speaking about China, FDI patterns there have been changing during the recent several years.

1) In 2005, manufacturing was the sector representing the majority of FDI, comprising more than 70 percent of the total (total FDI in 2005: USD60.3 billion). By 2012, the proportion of FDI in manufacturing already had fallen to around 43.7 percent (total FDI in 2012: USD111.7 billion).

2) The proportion of real estate FDI in China more than doubled from 2005 to 2012, rising from 9 percent to 21.6 percent. Comparing 2005 and 2012 (as both these years are rather recent for this research report) the following statistics can be taken from China Monthly Statistics of January 2013. [19]:

Sectors	2005 Percentage	2012 Percentage
Manufacturing	70,4%	43,7%
Real estate	9,0%	21,6%
Leasing and business services	6,2%	7,4%
Wholesale and retail trade	1,7%	8,5%
Transport, storage and post	3,0%	3,1%
Information, computer and software	1,7%	3,0%
Utilities	2,3%	0,8%
Scientific research, technical services and geology	0,0%	2,8%
Agriculture, forestry, animal husbandry and fishing	1,2%	1,9%
Others	4,5%	7,4%



To show the changes in key FDI sectors more illustratively, the author would like to introduce the diagram drawn also on the basis of previously introduced China Monthly Statistics [21]:

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The conclusions are quite evident, while the manufacturing sector's role as a key investment sector fell down, there were new sectors introduced to this sphere such as real estate, leasing and business services, retail trade and some others.

So, it can be said that these are the sector which now represent the major attractiveness.

The current condition of FDI in China is such that by the results of 2014 China is on the first place by the size of FDI with $347,8 billion. [12]

The first 10 countries of this list are shown in the table in Appendix 1.

Outward direct investment

ODI or outward direct investment is the opposite of FDI which shows the amount of investment carried by Chinese investors towards the foreign world. [18]

As Ministry of Commerce of China has recently stated: Chinese ODI in 2014 prevailed FDI of the country making the country a net capital exporter for the first time.

	2013	2014	Percent change, %
Total ODI (US$ billion)	107,8	120,0 (estimated)	11,3%
Non-financial ODI (US$ billion)	90,2	102,9	14,1%
Revenue from China's overseas contracting projects (US$ billion)	137,1	142,4	3,8%

This steady growth trend is expected to continue as Chinese companies increasingly realize that overseas investment is an effective strategy for them to upgrade, transform and become more competitive.

The Head of Outbound sector of KPMG in China while describing this situation said: “With

US$1.25 trillion in ODI expected over the next decade, China seems set to enter the fast lane as a `global investor'. Overseas investments are helping more Chinese companies from more sectors access new markets, and acquire the experience, technology, brands and human capital necessary to become more competitive. Recipient countries are also benefiting from the capital, experience, cost-competitive inputs to the production process and expanded market opportunities that Chinese investors bring. There is an increasing recognition that Chinese companies can achieve success in areas like infrastructure and agribusiness by `partnering' with incumbent players in key target markets.”[16]

The author would like to conclude the two previous paragraphs by presenting his own opinion that both FDI and ODI sectors will continue to grow in future and, probably, the difference between ODI and FDI will grow as not only the attractiveness of China as an investment destination is constantly growing along with its investment potential but also the profitability and performance of Chinese companies continue to improve and expand allowing them themselves to strengthen and intensify their newly-possessed position of a global investor.

Political climate, overall philosophy and credit ratings

The government of China has recently introduced different policies to attract foreign investment. While in some industries investment needs to be approved by the authorities of central government such as the Ministry of Commerce, the authority to approve vast majority of foreigninvested enterprises (where value of total investment is lower than USD300 million), has been delegated to local governments. Some investment projects that exceed the mentioned size still do not require overall state planning control and can still be approved at the local level.

In line with WTO commitments to create a level playing field, the PRC government has extended equal tax treatment to all enterprises no matter domestic invested or foreign. However, in order to continue encouraging technological development, new concessions have been introduced to high technology industries. All of these actions find their reflection by the high ratings of world credit ratings organizations. These organizations provide a reliable measure and a signal toward investors all over the world about the reliability and stability of the country's economy. Some of the following ratings are shown in the following shot from Bloomberg API.

investment fix asset china

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All three key agencies estimate the Chinese economy as the one with a stable outlook and rather high value of credit rating.

Modern tendencies

Another issue to be analyzed is the recent tendencies in the common development of the commonwealth which can become a source of increasing investment attractiveness and, consequently, investment potential.

Firstly, from the latest news “Vedomosti” magazine has announced that China is going to increase the role of innovations in the economy.[6] China put innovations on the 1st place in its 13th 5year plan of economy development (oriented on 2016-2020). According to McKinsey, in 2014 China spent on R&D approximately $200 billion (nearly 2% of its GDP) which as an absolute value is the second world's result. [16]

Main outlines

The People's Republic of China as a country particularly outlining its economic performance over the latest 10 years and also including even some estimates up to 2017 for major economic indicators. Besides that, the author has presented statistics and analysis of most significant branches of investment, current condition of this sphere and upcoming trends. The main of them should necessarily be outlined here. They are the future growth and expansion of R&D sector, growth of both FDI and ODI due to the growth of economy in whole and increasing investment attractiveness. First economy of the world by GDP Real from December 2014 it has all signs and opportunities to continue growing on the same level. The history of China from 1979 accounts for the most prolonging, continuous and powerful economic growth in the history of mankind. The economic policies of the government also contribute to the creation and support of attractive investment climate both for domestic and foreign investors which is confirmed by stable high credit ratings marks.



Conclusion

To summarize the ideas described in this research, it should definitely be said that investment potential is an analytic topic of great significance for any economy of the world. While reflecting the whole economic potential and current performance of the country and also being a foundation for estimates of future economic trends, it is a valuable tool and aim for scientists, statisticians, politicians and economists who want to deal with the unpredictability of some economic events in the post-crisis time the world is currently going through.

The analysis for China has been carried out because of the same reasons as China is the fast developing country, the leading exporter of the world. And, nowadays as it has been found out, it is also the leader in FDI investment, China has large influence on global economic trends and conditions.

By this analysis, it has become clear that the investment potential of People's Republic of China still stays on a stable and high level and, moreover, has possibilities for future growth despite the recent fall in GDP growth rate YoY.

Wide economic reforms were begun in China in the end of 70s but their effect has become really obvious only 20 years later. During this time Chinese economy left behind the Japanese one and came really close to the American one. China accumulated $2500billion of currency reserves, became the greatest steel producer and car manufacturer in the world. 48% of the world's copper consumption and 67% of iron ore consumption belong to this country. The Chinese consumer demand is exactly the main moving power of price increases on metals and the key factor pushing oil prices up, as well.

Nowadays China is going through a long way that has been passed by “Asian tigers” in 1980s. These massive structural changes of economy such as urbanization growth, for example, always go along with increased rates of production, increased volumes of investment and increased level of consumer demand. So, the Chinese economy will need at least 20 more years in order to finally reach the same level of economic performance as other industrial powers and during all these years rates of economic growth will be really high. All of that can be summarized as the conclusion that the People's Republic of China remains an attractive investment destination for both overseas and domestic investors, however, in the next few years, it will become increasingly complex as the business landscape continues to evolve.

This idea is also supported by the main indicator of investment efficiency into the main capital, ICOR, Incremental Capital Output Ratio, which has been stable for China during the last 30 years being 3 times higher than ICOR of the USA. It means that Chinese investment flows will stay highly effective on the macro-level.

So, considering all the previously discussed aspects of the problem, now it becomes absolutely clear that the investment potential of the People's Republic of China is great and will definitely stay on this level in the nearest future.



Reference list

I. Official documents

1. Federal Law from 25.02.1999 N39-FL “About investment activities in the Russian Federation realized in the form of capital investment” II. Monographs, composite works:

2. Investment management Guskova N.D., Krakovskaya I.N., Slushkina U.U, Makolov V.I. - M. : Knorus, 2010.

3. Katasonov V.U. Investment potential of economy: mechanisms of formation and use - M. : Ankil, 2005.

4. Principles of Accounting Needles E., Powers M., Crosson S. - DePaul University, 2011.

III. Periodical Press:

5. Hamlin K. China overtakes Japan as World's Second-Biggest Economy // Bloomberg. - 16.08.2010.

6. Klover C. China strives to increase the role of innovations in the economy // Vedomosti - 05.11.2015.

7. Role of investment in economy Ponomarev A.M., Vorobyev I.M. // Young Scientist. - №10. - 2015.

8. Worstall T. China's Now The World Number One Economy And It Doesn't Matter A Darn // Forbes - 07.12.2014.

IV. Internet Sources:

9. An Encyclopaedia Britannica Company - www.merriam-webster.com

10. Asia-Pacific Economic Cooperation - www.apec.org

11. Brazil, Russia, India, China and South Africa Organization - www.brics-info.org

12. Centre of Humanitarian Technologies (informational-analytical portal) - www.gtmarket.ru

13. Forbes - www.forbes.ru

14. G20 - www.g20.org

15. International Monetary Fund - www.imf.org

16. KPMG - www.home.kpmg.com/xx/en/home.html

17. McKinsey & Company - www.mckinsey.com

18. Ministry of Commerce People's Republic of China www.mofcom.gov.cn

19. National Bureau of Statistics of China - www.stats.gov.cn

20. Shanghai Cooperation Organization - www.sectsco.org

21. The World Bank - data.worldbank.org

22. United Nations Organization - www.un.org

23. World Trade Organization - www.wto.org

24. Xinhuanet News Portal - www.news.xinhuanet.com



Appendix 1

FDI Top 10 World Countries Rating (2014)

World Development Indicators : Foreign Direct Investment (FDI) 2014
China	$347848740397
USA	$294971000000
Hong Kong	$76638677437
Russia	$70653718709
Canada	$67581373072
Singapore	$63772316791
Australia	$51966834047
Germany	$51266993711
Ireland	$49960134752
Great Britain	$48314454024

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