Fabricated FDI in China

FDI is an indispensable engine for Chinese economy. When choosing investment location in China, FDI is very cautious. To a certain degree, the amount of FDI is closely related with the investment environment of the place which refers to natural endowments and various kinds of soft environments including governmental service. Seeing from the experience, the place with more FDI tends to be area whose economy is the most vibrant in China. According to the statistic, the east region has attracted nearly 90% of FDI in China.

Although foreign investors will assess and rank the investment environment of different regions of China and these assessments will truly influence the FDI of the regions, the rank is not so simple as FDI amount in the eye of the authority – one simple reason, it takes time to transform investment environment rank to real FDI, and the rank is too subjective to become an indicator for local government to judge officials’ performance. Therefore, under the pattern of GDP tournament, the amount of FDI will become an important indicator for local officials’ promotion.

Then, local officials are so keen to attract FDI that many related frauds appear in many places. One way to fabricate more FDI figure is to persuade foreign enterprises to increase its registered capital. For example, the original registered capital of a foreign company is $2 million, then the amount may be increased to $10 million after local government’s requirement, with the fund gap provided by the local government. Another common way is to invite Hongkong or Macau people to start a pure shell company, and then they will withdraw the registered capital after a week. Such seemingly absurd FDI frauds make sense in practice.

First of all, government officials can deal with the top-to-bottom performance evaluation pressure with fabricated FDI. Under the current administrative system, lower-down officials can only complete the task given by the top levels no matter how irrational the performance evaluation is. Otherwise he will face the risk of losing his position. The simplest query is that why only you can not finish the task while others can. As a result, fabricated FDI starts to be popular among different places.

Moreover, different groups can benefit from these FDI frauds: local officials can be promoted to a higher position, while the merchants can acquire all kinds of rewards from the local government – including but not limited to cash bonus, land or other resources, and brokers can also obtain a lot of money. According to the report, there still exist some special companies providing foreign capital registration and charging fees from the local governments. The report says that the cost for local government to purchase foreign capital is rather high, rising from 40,000 ~ 60,000 RMB per million US-dollar registered capital to as high as 300,000 ~ 400,000 RMB per million US-dollar registered capital in many places as comprehensive cost currently.

Then, there appears a very interesting phenomenon. Although everyone thinks fabricated FDI is very bad, they all remain reluctant to break the bubble in real operation for it involves a too extensive interest chain. But for the Central Discipline Inspection Commission’s accusing such frauds in October of last year, the phenomenon may still last for rather a long time.

Only after we eradicate the improper requirement of FDI from the source and let the government back to its basic function of public service can we annihilate the seemingly simple but actually wretched government performance evaluation indicator of fabricated FDI.

Published in China Business News| 2015-2-27