Neighboring Countries Gain from China’s FDI

By+XIANG+ANBO+&+ZHOU+QIAN

SINCE 1979， when the policy of reform and opening-up came into force， Chinas economic growth has been among the most rapid in Asia.

Owing to similar cultures but different natural resources， China and its neighboring countries have complemented one anothers needs during their respective phases of development. Bilateral investments and cooperation are hence mutually beneficial to China and its neighbors. These complementary economies and comparative advantages promote the circulation and optimal allocation of resources and production factors， as well as economic globalization.

On a Roll with Guaranteed Polices

Chinas expanded participation in economic globalization has accelerated growth of its outward foreign direct investment （FDI）， which rose from US$26.51 billion in 2007 to US $87.8 bil-lion in 2012， making China one of the worlds top three investors. FDI stock has shown an annual growth of more than US $40 billion， or 20 percent， having surpassed US $100 billion in both 2011 and 2012. Chinas outward investment fields and destinations have steadily expanded. By the end of 2012， Chinas 16，000 investors had set up around 22，000 overseas companies in 179 countries and regions – a coverage rate of 76.8 percent. As major recipients of Chinas outward investment， these neighboring countries have absorbed more than 30 percent of Chinas FDI.

Since the international financial crisis， China has stepped up FDI in its neighboring countries. Taking the Association of Southeast Asian Nations（ASEAN） as an example， Chinas investment rose from US $968 million in 2007 to US $2.484 billion in 2008 – a 156.6 percent increase. By 2012， Chinas investment in ASEAN had reached US$6.1 billion， a year-on-year growth of 3.3 percent. （See Chart 1）

Chinas FDI stock in ASEAN rose from US $3.953 billion in 2007 to US$6.487 billion by the end of 2008， a 64.1 percent increase. In 2012， this figure reached US $28.24 billion， a 31.6 percent increase. （See Chart 2）

In recent years， China has expanded its fields of investment in neighboring countries from construction projects to those of manufacturing， wholesale and retail， electric power， gas and water production and supply， business services，building， mining， communication and transportation， warehousing， technical services， agriculture， forestry， animal husbandry， fishery， real estate， and catering （See Table 1）

To regulate investment behavior， protect investors interests and promote mutual investments， China and Russia signed in 1994 The Agreement on Avoidance of Double Taxation and Evasion of Income Tax. Similarly， in 1995 China and Ukraine signed The Agreement on Avoidance of Double Taxation and Evasion of Income Tax and Property Tax. In 2006， China and Russia signed The Agreement on Encouraging and Protecting Mutual Investment， and in 2009 China and ASEAN signed The ChinaASEAN Free Trade Area Investment Agreement. These documents guarantee both sides sustained investment cooperation， so constituting an institutional basis on which the two sides complement one another.

Further Cooperation， Mutual Development

Since the financial crisis of 2008， China has expanded investments in its neighboring countries， where scores of Chinese enterprises have set up factories each year. This has generated a technology spillover effect， so improving local technology. It has also created more jobs， thus raising local income levels and promoting local economic development.（See Table 2）

In the 1980s， China and ASEAN countries began strengthening investment protection through international investment agreements. The ensuing years featured bilateral and multilateral investment agreements， and also a comprehensive economic cooperation framework agreement. The year 2009 saw the setting up of the US $10 billion China-ASEAN Investment Corporation Fund. The China-ASEAN Free Trade Area （FTA）， officially established on January 1， 2010， was the first regional FTA in whose establishment China participated. This economically integrated market owns the worlds most consumers and covers the largest blanket area. The areas population of 1.9 billion has generated a total output value of US $6 trillion and a total trade volume of US$4.5 trillion. Overseas Chinese communities in Southeast Asia enjoy the advantages of complementary resources， large populations and similar languages and customs. All of these factors benefit the bilateral circulation within the region of agricultural， mineral， industrial， technical and cultural products. In 2012， Chinas flow of investments to ASEAN reached US $6.1 billion， an increase of 3.3 percent over 2011. The same year its FDI stock in the region rose to US $28.24 billion， a 31.6 percent year-on-year increase. By August of 2013， bilateral investments between China and ASEAN had hit US $110 billion. Chinas investments in ASEAN have grown at the most rapid rate of all its outward FDI， making it ASEANs fourth biggest source of foreign investment.

China is now promoting an upgraded version of the China-ASEAN Free Trade Area. It will expand the markets for goods， services and investment， so spurring greater interconnectivity and intercommunication that will enhance the two sides economic cooperation. China supports the Regional Comprehensive Economic Partnership （RCEP）， a free trade agreement scheme jointly launched by the 10 ASEAN member states and its FTA partners （China， South Korea， Japan， India， Australia and New Zealand）， based on the “10+1”（ASEAN plus China）， “10+3” （ASEAN plus China， South Korea and Japan）， and the East Asia Summit （EAS） cooperative mechanisms.

The financial crisis has changed the world economic pattern， considerably influencing the external trade and investment environment of both China and Russia. During the latter stage of the downturn， China strengthened investment cooperation with neighboring countries， notably Russia. The strategic significance of this partnership enabled the two countries to jointly confront the changes and challenges emanating from the world economy. The two biggest neighboring countries in Northeast Asia， China and Russia have geographical advantages that facilitate cooperation and maintenance of the tradition of friendly communication. The two countries are now considering multiple opportunities for investment cooperation that could advance economic development as well as peace and stability in Northeast Asia as a whole. Construction of the Silk Road Economic Belt， for example， will add impetus to the gradual recovery of the world economy as well as benefit the countries along it.

Ukraine has a solid industrial and agricultural foundation， a vast market， rich resources and a high-quality labor force. It is at present in the throes of economic restructuring， infrastructure construction and improvement of its peoples livelihood. As China and Ukraine are economically complementary， they have great investment and cooperation potential. Recent years have seen rapid development of bilateral economic and trade relations between China and Ukraine and fruitful results of their cooperation. The Chinese and Ukraine governments signed The Agreement on Encouraging and Protecting Mutual Investment； The Agreement on Avoidance of Double Taxation and The Bilateral Currency Swap Agreement， so providing a sound institutional guarantee through which to promote mutual investment. In 2012 Chinas direct investment in Ukraine amounted to US $2.07 million， and by the end of 2012， Chinas FDI stock in Ukraine reached US $33.14 million.

China also participated in the APEC， ASEM （Asia-European Meeting）， Shanghai Cooperation Organization and other regional economic cooperation organizations， whose core purpose is to facilitate trade. It moreover joined the Bangkok Agreement and signed the China-Pakistan Preferential Trade Arrangement. Based on the principle of mutual benefit and cooperation， China has expanded investment in neighboring countries， strengthened economic interdependence， and contributed much to their development and realizing mutual benefit and a win-win situation.

Heightened Investment in Neighboring Countries

Peace and development are the themes of the current era. Peace， heightened cooperation and development are hence the goals of most Asia-Pacific countries and the regional mainstream. The relationship between major countries in this region has maintained the momentum of progress and development through strengthened dialogues and coordination， and greater interdependence. Peaceful negotiation is now the fundamental mode of solving disputes， and there now exists more proactive forms of security dialogue and cooperation. This congenial international and regional environment has provided China with opportunities to invest in neighboring countries.

China and its neighboring countries have similar cultures， complementary industries and are in relatively close geographical proximity. As these states constitute an important area for Chinas outward development， Chinas strategy has been one of proactively incorporating them into its industrial ambit. Focusing on their needs， Chinas investment in its neighboring countries has taken into account their economic development and industrial layout， so forming a mutual benefit and win-win pattern in the investment field.

Economic development is the basis for world peace， but lasting world peace and stability can only be achieved through coordinated， balanced and holistic global development. In the process of investing in neighboring countries， China has maintained the principle of“being a good neighbor and partner， strengthening neighborly friendship and deepening mutual benefit and cooperation.” It has thus cultivated a more favorable environment for economic development through economic integration. China has moreover improved diplomatic relations by strengthening political relations with these countries， in accordance with the trend of forming a community of interests. All these factors undoubtedly contribute to regional peace and stability.

The global industrial pattern and division of labor faces a new round of adjustment. China， meanwhile， is undergoing transformation of its development mode and economic restructuring. Although it commands the worlds largest foreign exchange reserves， China must now meet the practical demands of transforming these assets into physical investment. Upon assessing the situation and carrying out necessary research on the new trend of domestic and international economic development， China will doubtless enlarge its fields of cooperation and expand investment in its neighboring countries.