| The rise
of foreign direct investment (FDI)
During the Mao period (1949-1976), China spurned
foreign investment and paid back all its foreign loans (mostly to
the Soviet Union) by 1965.
After taking over economic policy at the end of
1978, Deng Xiaoping opened up China to foreign trade and
investment and in the early 1980s the first Special Economic Zones
were set up to absorb direct investment from Hong Kong and
elsewhere.
During the 1980s, FDI inflows
grew steadily but remained relatively low, confined largely to
joint ventures with Chinese state-owned enterprises. After the
Beijing Massacre in 1989, western and Japanese companies withheld
investment in China, but the momentum was maintained, partly by a
new influx of capital from Taiwan.
Deng Xiaoping toured Guangdong
and Shanghai in early 1992, encouraging a further and much more
massive wave of foreign direct investment, increasingly in the
form of wholly-owned subsidiaries of foreign companies, which
contributed towards an acceleration in GDP growth
and inflation. FDI inflows peaked at over
US$45bn a year in 1997-98.
A further surge in FDI preceded
and accompanied China's accession to the World Trade Organisation
(WTO) in December 2001, promoting China to top position as an FDI
destination in 2003.
In the early 1990s, contracted
FDI exceeded actually used FDI by a large margin. This gap
narrowed in the second half of the decade as the authorities
became more realistic in registering inflows and as the pace of
increase slowed, but it has widened again sharply in recent years.
By 2003 contracted FDI was more than double utilised FDI.
Actually used FDI reached a
record US$72.4 billion in 2005 (the original estimate of US$60.3
billion published in early 2006 was revised upward in June 2006 to
include investment in the financial sector).
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