Especially at risk are the kinds of investments that bring new arrivals to China with innovative ideas and cutting-edge technology, an important channel through which economies learn to be more productive and propel gains in living standards.
“For China, FDI was never really about the money. It was all the things that came with the money,” said Eswar Prasad, a former China division chief at the International Monetary Fund who is now a professor of trade policy and economics at Cornell University. “China does not yet have the capacity to generate a great deal of innovation.”
China also calculates FDI by adding up the value of nonfinancial projects registered and approved by its Ministry of Commerce. Economists say both measures likely overstate foreign investment in China because they include inflows from Hong Kong, a significant chunk of which is, in fact, Chinese investment funneled through the financial center to get around China’s capital controls.