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Last updated at: (Beijing Time) Wednesday, November 27, 2002

Capital Flow: 'Barometer' of World Economic Operation

Capital flow is an economic phenomenon, the law and characteristic of its flow have reflected from one aspect the situation of the current world economic operation. In recent years, particularly after the "September 11" incident, how has international capital flowed? What influence will its change exert on the global financial system?


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Capital flow is an economic phenomenon, the law and characteristic of its flow have reflected from one aspect the situation of the current world economic operation. In recent years, particularly after the "September 11" incident, how has international capital flowed? What influence will its change exert on the global financial system? The Viewpoint of this issue will, together with you, come to understand the arteries and veins of these problems through dialogs with the International Weekly.

Viewpoint: In the surging trend of economic globalization, foreign direct investment (FDI) has become an increasingly important factor affecting the economies of various countries, various regions and even the whole globe. What is the proportion of FDI to the composition of the current capital of various countries? And what role does it play in countries of different types of development?

Weekly: Dr. Zhan Xiaoning, expert on the investment issue of UNCATD (UN Conference on Trade and Development), points out that currently the proportion of FDI to the composition of capital of various countries has been on the increase, it has reached 25 percent in developed countries, an average of 13 percent in developing countries, and 15 percent in China. Viewed from the proportion of the stock of foreign capital to GNP, the proportion is 21 percent in developed countries and 31 percent in developing countries.

For the developing countries, foreign capital plays the role in increasing jobs and introducing technologies, and exerts influence on economic development that must not be neglected. Take China for example, the rate of contribution made by foreign capital to China's economic growth has reached 15 percent, it plays a very great role in China's adjustment of the industrial structure, in breaking the monopoly of trades and in enhancing market competitiveness.

In terms of the developed countries, their direct investments in the production field of developing countries are mostly the transfer of trades, which is conducive to the adjustment of the economic structure; while their direct investments in the foreign servicing field is expansive, which helps them occupy more markets.

Viewpoint: Would you please say something about the development situation of FDI made in recent years in the United States, European countries, developing countries including China, and the characteristics presented by FDI?

Weekly: Generally, from the United States, Europe and Japan to the developing countries, international capital, in order to keep abreast of the new situation, has been continuously seeking safe and profitable sites, and presenting attractive new changes and new characteristics: the United States, once the biggest capital absorber in the world, has presently witnessed the trend of a slowdown in the inflow of capital, while the developing countries in urgent need of funds, due to the irrational international economic and trade system, have seen the phenomenon that their capital, to different extents, has "flowed backwards" from their own countries to the developed countries. While China, in a uniquely favorable situation, continues to maintain the good momentum of capital attraction.

The United States. For many years, the US market has been regarded as a "risk asylum" and the US dollar asset as a "risk buffer tool". The United States, in fact, plays a pivotal role in the flow of international capital, i.e., on the one hand, it attracts large amounts of international capital; on the other hand, it makes large amounts of investment abroad. The amounts of the inflow and outflow of US capital account for one-third and one-fifth respectively of the world total. The change in the inflow and outflow of US capital reflects, to a considerable extent, the adjustment to the global investment tactics of large international investment organizations.

However, the continuity of this special role of US assets has recently been shaken: This is expressed, on the one hand, in the sharp drop in the US stock market price and in the devaluation of the US dollar and; on the other hand, in the scale of international capital flowing into the United States beginning to decrease. The total amount of purchase of US assets by foreign countries began to decline in 2001, and in the first five months of 2002, the net purchase of US equity capital by foreign countries and the net scale of FDI both further decreased compared with the same period of the previous year.

European Countries. In the first half of 2002, the European market was faced with the impact of confidence crisis as was the US market, causing an all-round fall in the price of the European stock market. The factors giving rise to confidence crisis, such as the financial scandal and the collapse of bubble, as well as the serious financial losses of financial institutions and insurance companies, have also become the main risks to the flow of capital into the European market. For instance, the information about the huge amounts of losses appeared in HVB (Germany bank) and Aegon (Dutch company) has caused a shock-wave effect on the market. The interaction of the European and US markets is considerably high. So while calculating profits gained after risk adjustment, the European market is by no means superior to the US market.

Developing Countries. In the total scale of international capital investment, the proportion held by developing countries is less than 10 percent. This inferiority determines that the developing countries are in a passive position in international capital investment. The good or bad economic and financial situations in developed countries have a great influence on the external fund-raising conditions for developing countries, especially in regions where finance is comparatively open. The total amount of international capital on newly emerging markets of the developing countries, after experiencing a sustained sharp drop in 1998, 1999 and 2000, began to pick up in 2001, with the total amount of inflow restoring to the mid-1990s, this was benefited mainly from increase in bank loans and the issuance of bonds, while the amount of equity investment absolutely came down. In the beginning of 2002, the newly emerging market was greatly impacted by the investment confidence crisis on developed markets, in the second quarter of the year, the inflow of total capital was only US$34.5 billion, or only two-thirds in the same period of the previous year.

China a sharp contrast to most countries suffering reduction in FDI. FDI in China has maintained a good momentum of sustained growth in recent years. Firstly, the amount of capital outflow of principal large countries absorbing foreign capital outstrips the amount of capital inflow, making them net capital outflow countries, while China is a net capital inflow country, with the amount of net inflow reaching US$45.1 billion in 2001; secondly, the majority of FDI in China are concentrated on newly built projects, the amount of investment made in newly built projects in 2001 stood at US$44.5 billion, representing 94 percent of the total amount of foreign capital.

In addition, FDI in China is undergoing the transition from labor-intensive to capital- and technology-intensive industries, and tilting toward manufacturing and service industries of high-and medium-technological content, this situation shows that the quality of FDI flowing into China is improving continuously.

Viewpoint: What's the reason for the change of FDI in the United States? Since the United States plays a pivotal role in international capital flow, then what influence will the said change generate on the adjustment in the pattern of global capital flow and on the stability of the global financial system?

Weekly: The main reason for the change of FDI in the United States is the exposure of a series of financial scandals that have shaken the confidence of the investors, for instance, the incident of the Enron Company as well as the financial scandal of the US World Communication Company that involved US$3.8 billion, some involved financial and insurance institutions are faced with tremendous losses, while making investment decisions, they try harder to avoid risk and reduce investment in tools and markets that involve high risks. Investors' shaken confidence is mainly due to their fear of US economic recovery and devaluation of the US dollar.

If the slowdown of the US capital inflow is only a temporary adjustment, then there will not be great change in the pattern of international capital flow and the stability of the international financial market will not be subjected to tremendous impact. But if the shrinkage of the US market is lasting, possible risk will be a lack of a most safe place for investment in the world.

Viewpoint: Given this, whether or not there will be great change in the pattern of international capital flow depends mainly on whether the withdrawal of international capital from the US market is a temporary adjustment in the investment tactics, then how should this point be judged?

Weekly: Whether the reduction of US capital inflow is a temporary adjustment depends primarily on whether the adjustment of US asset price is controllable. And whether the price of US assets, especially the fall of the stock market price, is controllable, depends on the investors' anticipation of the prospect for profits after US companies' risk adjustment. Although there was a fall in profits after risk adjustment, the United States still has the edge on European and Japanese markets, to a certain extent, this alleviates the speed and intensity of the adjustment of US asset price, thereby alleviating the speed and range of the reduction of international capital investment in US equity and company bonds.

Viewed from the structure of tools, government bonds are relatively safe. US government bonds have always been regarded as the investment tools of the least risk and highest quality by investors when they seek "high-quality" investment. There will be no fundamental change in the role of US government bonds, unless the US government reduces the issuance of bonds out of its own requirement. Given this, there will not be substantial reduction in the part of government bonds in US capital inflow.

In addition, the US financial market remains the world's largest market with the highest degree of liquidity and diversity, if international investors do not dump and cash the financial assets in their hands, then their capital withdrawal from the US market is likely to be only temporary adjustment of their investment tactics.

By People's Daily Online


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