1. Erskinomics Australia-China Free Trade Agreement Conference Foreign Investment The rise in FDI into China Myths and realities Alex Erskine, Erskinomics Consulting Pty Limited alex@erskinomics.com 13 August 2004, Sydney

2. Erskinomics Australia-China Free Trade Agreement Conference Myth-building: the official story Source: Erskinomics

3. Erskinomics Australia-China Free Trade Agreement Conference Myth-building: the official story Source: Erskinomics

4. Erskinomics Australia-China Free Trade Agreement Conference Myth-building: the official story Source: Erskinomics

5. Erskinomics Australia-China Free Trade Agreement Conference The extent of overstatement so far No firm data: intrinsic secrecy in “round-tripping” Outward leg: Capital created in China, intermediated through HK or other financial centres to escape regulations and to gain value-added services Outward leg: “capital flight” achieved through over-invoicing for imports and under-invoicing for exports, smuggling, or investing in HK “Red Chip” IPOs of PRC companies About ¼ of flight capital later returns (“round-trips”) as FDI when opportunities emerge Other errors, e.g., wrongly counting PRC-based investment in FIEs as FDI Source: ADBI Discussion Paper No 7 by Geng Xiao June 2004

6. Erskinomics Australia-China Free Trade Agreement Conference Deflating the “great sucking sound” Source: ADBI Discussion Paper No 7 by Geng Xiao June 2004

7. Erskinomics Australia-China Free Trade Agreement Conference Replacing myths with realities: the greater future Source: Erskinomics

8. Erskinomics Australia-China Free Trade Agreement Conference CalPERS, a key US pension fund manager, is restricting its overseas investment allocations to qualified markets Source: Asia Times 2003 CriteriaOKNOT OK 50% market quality Market regulation, legal system, investor protection; settlement times, transaction costs; capital market openness; liquidity; and volatility Developed markets inc Japan, Hong Kong and Singapore China India Indonesia Malaysia Philippines* Sri Lanka Thailand 50% country quality Political stability; transparency; and labour practices Emerging markets inc Korea and Taiwan *Philippines appealed (successfully) to CalPERS in 2002 and has appealed again in 2003

9. Erskinomics Australia-China Free Trade Agreement Conference Drivers of less “round-tripping”and more “genuine” FDI Drivers of reduced “capital flight” Expectations have turned around to favour RMB appreciation Improved protection of domestic investors ahead Drivers of reduced “round-tripping” FDI Unitary tax, reduced concessions & differential protection for FIEs Drivers of increased “genuine” FDI Rule of law, development of finance sector and capital markets Expansion of developing country and developed country MMCs Start of convergence between China’s PPP and market exchange rate

10. Erskinomics Australia-China Free Trade Agreement Conference Always read the fine print! Copyright 2004. Erskinomics Consulting Pty Limited. All rights reserved. Please cite Erskinomics as the source. Disclaimer. Under no circumstances is this to be considered as an offer to sell or solicitation to buy any investment. Erskinomics Consulting Pty Limited does not guarantee its accuracy or completeness and disclaims any responsibility for loss or damage suffered by any person relying, directly or indirectly, on this presentation, including in relation to negligence or any other default. Opinions and estimates constitute judgments, which change as circumstances change, if not before. Alex Erskine, Managing Director Erskinomics Consulting Pty Limited ACN 089 131 242 PO Box 219 Neutral Bay NSW 2089 Mobile 0411 243 860 Fax 02 9908 1589 E-mail alex@erskinomics.com