Reports that a large amount of foreign capital has been leaving the Chinese economy have been widely publicized recently, but are these rumors true? Will the outflow of foreign capital affect the Chinese economy? Will China remain appealing to foreign investors? In a bid to find out the truth, People’s Daily, in association with International Financial News, approached a number of experts, governmental departments and foreign business to ask their opinions.

Is foreign capital pulling out of the Chinese mainland on a large scale?

In fact, there is some outflow of foreign capital from the Chinese economy, but it is not possible to come to the conclusion that this amount is in some way particularly large. Foreign media coverage has overstated the risk of investment within China.

In regards to the question of whether or not the outflow of capital is or is not taking place on a large scale, many economists and market analysts who received interviews from People’s Daily said it was difficult to find out how much foreign capital is flowing out of China. On account of the cross-border flow of capital being too complex to make accurate statistics for, it is difficult to determine the scale at which any supposed outflow is happening.

The conclusion that foreign capital is pulling back from China was made by analysing available data. According to the statistics released by the State Administration of Foreign Exchange (SAFE) on February 1, China’s capital and financial account deficit was $117.3 billion in 2012. The figure was revised to $16.8 billion in the 2012 China Balance of Payment Report, published on April 3. This indicates that China’s international payment has changed from a continuous double surplus to the current account surplus and deficit in the capital and financial account for the first time since 1999.

Some analysts make use of the residual income valuation to look into cross-border capital flows. According to SAFE data, China’s foreign exchange reserve in 2012 increased $98.7 billion. After deducting four stable investment items (foreign trade surplus, worth $231.1 billion; direct investment inflows, worth $34.5 billion; overseas investment income, worth $143.8 billion; and listed overseas financing $16 billion), the balance was minus $326.7 billion. This indicates that increasing amounts of hot money is flowing out of China. Nevertheless, it can not be confirmed from these statistics that the outflow amount is great.

Generally, the residual method omits some non-trade factors, including the changes in exchange rates and inflation. Furthermore, it overlooks trade factors, including service trade, revenue, current transfer, securities investment and other forms of investment. In addition, the methods used to calculate the statistics that are then used in the residual income valuation are calculated individually using different methods, and thus may not necessarily be compatible.

“When comparing it with other data, using the balance of payments is a more precise method to reflect the cross-border flow of capital. Nevertheless, it is hard to quantify the outflows in Chinese or foreign capital,” said Tan Yaling, President of China Forex Investment Research Institute, during an interview.

“At the beginning of the international financial crisis, the overseas price of assets went down and many Chinese enterprises and individuals seized the opportunity to invest overseas. Thus a lot of capital flowed out of China at that time,” Tan said.

He Maochun, Director of the Economic Diplomacy Research Center at Tsinghua University, argued that the allegations of foreign capital outflow do not conform to the facts. “Currently, outflow of foreign capital is a part of market behavior. The change depends mainly on the return on investments. On the whole, however, China remains the second largest economy, which is appealing to foreign capital,” said He.

He’s argument is supported by data. On July 22, an official from the State Administration of Foreign Exchange said, “Since May 2013, as the expectations for the Federal Reserve to withdraw quantitative easing get stronger, international capital has appeared to pull back from the emerging market gradually. In spite of this, there is no sign that the outflow of foreign capital from China is extensive.”

The official argued that foreign direct investment and net inflow of securities investment had still increased. The net inflow of foreign direct investment in June was $11.9 billion, a 14 percent rise compared to May. Exchange settlement of securities investments reached $1.5 billion, a 250 percent increase over May. The outflow of foreign direct investment is maintaining a low level. In the first half of 2013, a total of $3.5 billion in foreign direct investment left China, decreasing 17 percent year on year. The outflow of profit from foreign invested enterprises stayed steady over the period.

Experts believe that the foreign media artificially created reports of and hyped up the outflow of foreign capital from China in order to exaggerate the risk of investing China. Yuan Tangjun, Director of the Global Investment and Trade Research Center of Fudan University, said much of the news criticizing the Chinese economy came from Japan, with the Japanese media even coining a new term: “China Risk,” as Japan is the second largest investor in China.

Why is some foreign capital leaving China?

The reason is partially due to the rising costs of doing business in China. More important though, is to understand that the outflow is a form of provisional adjustment of foreign investment, and it does not affect the overall situation of the economy. The outflow of hot money is not necessarily a bad thing.

Through investigation by the correspondent, it was found that some foreign capital was indeed being transferred from China to other states because of policy changes or rising costs within China. Most outflows were short term removals for investment purposes elsewhere or speculative consideration, and these short term outflows of capital have no long term effect and as such do not change the investment situation within China for foreign capital.

As for industrial investment, the main reason for foreign-funded enterprises leaving China has been the rising costs of doing business. According to data released by the National Bureau of Statistics, the minimum wage increased year by year from 2009 to 2012. In the first half of 2012, the salary income of Chinese urban residents enjoyed a 13 percent rise while the salaries of rural migrant workers increased 14.9 percent compared with the same time of previous year.

On top of this, there was the recent decision to phase out the “super national treatment” regulations, which allowed for foreign-invested enterprises to receive preferential tax and land policies. This has increased the thresholds for foreign capital entering the Chinese market. A tax supervisor of a U.S. IT company in China said that frankly, today foreign-funded enterprises hardly enjoy any favorable treatment. “Super national treatment is a thing of the past.”

Is there any negative influence on the Chinese economy if foreign capital flows out of China? In the view of experts, it depends on the actual situation as a whole and outflow is not necessarily completely bad. For example, it is not bad for hot money to flow out of China.

“Hot money is short term for speculative capital. Too much hot money flowing into China is not good for its economy. All governments around the world take measures to prevent the risk produced by huge hot money inflows, such as rapid appreciation of domestic currency and high inflation pressure,” said Hua Min, Director of the World Economy Institute under Fudan University.

Some experts say that the outflow of foreign capital in the industrial sector needs to be taken note of. “In recent years, many enterprises from the Republic of Korea have left China. Some Taiwanese businessmen have also pulled their capital back from the mainland,” said Lu Zhengwei, Chief Economist of Industrial Bank.

However, other experts have different opinions. He Maochun said, foreign capital pulling back from some industries in China did not signify that all foreign capital would flow out of China in the future. The partial change in the foreign capital would not produce much influence on the Chinese economy. Currently, China should make policies and reform systems so as to encourage foreign capital to support the emerging industries that the country needs and prevent foreign hot money from creating market speculation and stealing wealth.

Will China remain appealing to foreign capital?

China is the largest market and has a huge potential for even more development. Foreign capital increases in investment to China will be an inevitable and long-term trend.

The outflow of foreign capital doesn’t imply that the Chinese mainland has lost any competitiveness. Song Songxing, Professor at the Business School of Nanjing University, said China remains more competitive than Western countries in respect to labor costs. “In the short run, foreign capital will not be pulling back from labor intensive industries in China. Instead, it will transfer from high-cost first-tier cities to second and third-tier cities,” Song believed that even though there was some outflow of foreign capital, the scale it is occurring on is not big.

Lu Zhengwei also agreed that China still possess advantage to foreign capital. He said, “Foreign capital came to China for its low prices of land and labor at first. Now, it focuses on the huge Chinese market. Though the cost of Chinese labor is rising, the quality of the labor force has improved a lot. Chinese workers are qualified to do more technical jobs than they were before.”

John Ross, senior financial researcher at Renmin University of China, is optimistic in regards to the Chinese economy. He said, “It is a global trend that capital is pulling back from emerging economies. The influence on China is quite small.” Because of huge development potential in China, it is inevitable for foreign capital to expand investment in China in the long run. Thus, the retreat of capital is a short-term and individual phenomenon, he added.

It is incorrect to assume there is any trend of outflow foreign capital simply by seeing individual cases of foreign enterprises leaving China. The number of enterprises leaving is not comparable to the quantity or quality of foreign capital remaining within the Chinese economy. For example, the data released by the Ministry of Commerce shows that the number of newly established foreign enterprises in China in June this year had reduced 17.31 percent year on year. However, the actual use of foreign capital increased 20.12 percent compared only to last year. The enterprises entering the country are fewer but money that is being invested is more. Foreign investment from the United States and the EU member nations present the same trend.

Another contributing factor is that there have been some structural changes in the foreign investment in China. Foreign investment in western and central China is growing rapidly. According to statistics for the first half of this year released by the Ministry of Commerce, foreign investment in eastern China increased only 1.69 percent while in western China grew 32.54 percent, with overall decreases in manufacturing and overall increases in service industries. Among the total $61.984 billion in foreign direct investment, service industries account for 49 percent, or $30.63 billion; while manufacturing accounts for 42 percent, or $26.44 billion, down 2.14 percent. Foreign capital in the service industry now contributes 7 percent more of total investments than manufacturing.

Cheng Meiwei, President and CEO of Siemens China, attributed the phenomenon to China’s economic transformation. In his opinion, foreign-funded enterprises in China need to make preparations and adjustments in order to adapt themselves to the changes taking place.

Stephen Shang, President and CEO of Honeywell China, and Jiang Tingting, media officer of GM China, both expressed their full confidence in the Chinese economy during interviews.