Foreign Direct Investments (FDI) vs. Speculative “Hot” Money: China’s Perspective


As of the let’s say very early Deng Xiaoping days, China found itself in a bit of a predicament when it came to the foreign capital inflow variable. More specifically, Deng understood all too well that China (desperately) needed Western capital but for a wide range of reasons (most of which political, of course), this influx of foreign capital needed to be controlled.

Even when it comes to countries which aren’t run by an entity such as the Communist Party of China and where political reasons to curb the inflow of foreign capital are considerably less of a factor, it has become quasi-axiomatic that not all foreign capital is created equal. More specifically, country after country ended up understanding that speculative “hot” money which is here today and gone tomorrow can do more harm than good. On the opposite end of the spectrum, few politicians meaningfully believe that Foreign Direct Investments should be discouraged.

For additional clarity, let us assume Country A has to choose between two investors:

  • Investor 1, who is interested in building a factory
  • Investor 2, who is interested in buying land

Needless to say, the authorities will (or at least should) do everything humanly possible to encourage Investor 1, to the detriment of Investor 2 for two broad reasons:

  • Investor 1, through the factory he intends to build, will unleash a wide range of economic forces. From temporary economic benefits such as those associated with actually building the factory (putting the local construction labor force to good use) to long-term ones associated with the workers that will be employed, the suppliers who will benefit (suppliers with infrastructure and workers of their own), we’ll limit ourselves to stating that this equation is quite close to something one might consider an economic virtuous circle
  • Investor 2, on the other hand, simply intends to buy and hold. On the one hand, there is absolutely nothing wrong with that in a capitalist framework and on the contrary, it is not difficult to think of scenarios where Country A benefits (even if less so compared to the Investor 1 equation). For example, Investor 2 may very well contribute to a bull market when it comes to Country A real estate, with the benefits that could bring about. However, the “easy come, easy go” dimension is problematic because on the other hand, it isn’t difficult to think about negative scenarios either, scenarios which revolve around perhaps panic selling and where Investor 2 “contributes” to a downward price spiral which wouldn’t have manifested itself in the absence of so much “hot” money (at the very least, it would have been more tame)

Furthermore, another category of reasons revolves around… well, having skin in the game.

When it comes to Investor 1, of course it is always possible for him to decide to pack his proverbial bags and ride into the sunset. However, logistically speaking, it tends to be far more difficult for him to do so than for someone like Investor 2. In Investor 2’s case, all he needs to do is place his land on the market, accept a reasonable price and the deal can be closed rather quickly. Would he have invested in something even more liquid like Country A stocks or bonds, Investor 2 could have even been nothing more than a sell order (clicking a button) away from leaving. For Investor 1 or let’s say from the perspective of Foreign Direct Investments, there is enough skin in the game to at least make it clear that FDI players have more than enough in the way of incentives to want to make their business (in our case factory) work.

What about China, specifically?

To over-simplify, we can consider this equation a combination between the political dimension and economic common sense, plain and simple.

China, just like any other nation, is interested in sustainable development, even if some of its actions oftentimes make observers think otherwise. And in the spirit of just that, of course it will tend to encourage Foreign Direct Investments more so than something like speculative Wall Street “hot” money.

Furthermore, unlike Western nations, there is also the political layer that needs to be placed on top of the sustainability equation. As a bit of an extreme example, a Western country would most likely encourage the creation of a modern TV studio that focuses on investigative journalism and free speech. In a country such as China, even if the FDI equation would make perfect business sense, it would be a stretch to assume the authorities would be thrilled.

However, and as a bit of a conclusion, make no mistake: China is in no way allergic to capital in general or Western capital in particular. It understands all too well and has understood this for multiple decades that Western cash flows are essential to its development. While it is true that China has relatively recently been switching to an economic model that revolves much more around domestic consumption, it doesn’t mean foreign capital is now considered unnecessary. That is most definitely not the case but it does need to be understood that unlike Western jurisdictions, investments (be they FDI or more speculative ones) need to meet more than just economic conditions for them to be accepted by the Communist Party of China in general and today’s Xi Jinping administration in particular.

“Nuance” is the operative word and should you be in need of assistance when it comes to reading between the lines in this jurisdiction (needless to say, something far more vital in China than in the West), our team is at your disposal. To find out what we can do for you, simply visit our Consulting section or to get in touch right away with a custom request, our Contact page is only one click away.

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