Surprise! China's Inflating FDI Numbers...

Filed in archive Information Sources on September 28, 2008

Saturday the UN Conference on Trade and Development (UNCTAD) released The World Investment Report for 2008. There were a couple of interesting tidbits in the report...

For starters, India has replaced China, for the first time, as the most promising destination for foreign direct investment in the medium-to-long term. China still ranks as the best destination for short term investment. CIOL took a nice look at the overall picture for Asia.

Seeking Alpha took a closer look at the China numbers. Here's part of what they had to say:

The number of foreign-invested research and development centers in China has risen from about 700 in 2004 to more than 1,200 this year. This is a clear indicator that China is transforming from a low-cost manufacturer into a center of innovation.

But Seeking Alpha went on to point out that the "fine print" in UNCTAD's report cautions investors about how China is inflating its FDI numbers.


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The UNCTAD report chides China for a little maneuver called "round-tripping." that may inflate FDI numbers from China by as much as 25%.

Seeking Alpha explains round tripping this way:

Round-tripping is driven by differences in the treatment of foreign and domestic investors, which may motivate investors to channel funds out of, and subsequently into, an economy in the form of FDI. Because the funds originate in the host economy itself, "round-tripping" inflates actual FDI inflows.

Much of the money making this round trip comes from Hong Kong.