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  • Has the Chinese Investment Wave Begun?

    The wire services have seized on a comment by a Chinese official that the PRC’s official foreign reserves actually fell in October. This is the first drop in almost five years, during which time China’s reserves went from $400 billion to $1.9 trillion.

    The decline hasn’t been confirmed, much less explained. The October trade surplus stood at $35 billion, making it difficult to understand how reserves might have dipped. Tentative explanations so far refer vaguely to a relatively small amount of money — just $50 billion or so, nothing important — leaving China because expectations were dashed that the yuan would rise further.

    There is another possibility, however, one that would extend even beyond the financial crisis. A small part of the reduction in reserves may have stemmed from a historic switch in foreign direct investment patterns with respect to the PRC.

    Direct investment into China has played a crucial role in its economic development. But October may have marked the first time that direct investment out was bigger than direct investment in. While any difference would have been quite small, it helps account for the reversal of direction in reserves. This possibility is corroborated by tracking of Chinese outward investment done at the Heritage Foundation, which shows even record official totals for this year still understate true Chinese spending overseas.

    The China story is changing. A big part of that change is comparatively less money heading for the PRC and much more Chinese money heading for the world. This month marks the 30th anniversary of reform. It may be that, 30 years from now, October 2008 will also be seen as a milestone.

    Posted in International [slideshow_deploy]

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