Analysis On Potential Risks Of FDI To BOP In China

Since the reform and opening-up policy, foreign direct investment (FDI) has been playing an important role in China's economy. FDI has affected China's Balance of Payment (BOP) from the current account to the capital and financial accounts. The potential risks of FDI to Balance of Payment have gradually emerged.Based on the theories on international direct investment and adjustment of balance of payment, the paper gives a brief look on the progress of FDI in China and analyzes the "double surplus" feature in our BOP structure. Then it makes a discussion on the relationship between FDI and BOP, that is, the inflow of FDI is main reason for the surplus of the capital and financial accounts. The exports of FDI enterprises contribute a lot to the surplus of trade account. However the profit remittance of FDI enterprises leads to the deficit of receipt account.Once there is a reversal of economic situation or a sudden accident, the inflow of FDI will drop sharply and FDI enterprises will take measures, such as profit remittance and capital withdraw, to hedging the reversal, which will worsen the balance of Payments.Especially, RMB exchange rate keeps on appreciation since the reform of RMB exchange rate regime. The expectation on further appreciation stimulus the inflow of FDI and postpone the remittance of profit. Furthermore we cannot find out the sum of the money which FDI in name, hot money in reality. All of these will aggravate the potential risks of China's BOP.To illustrate the probity of BOP crisis in China, the paper summarize the lessons from the crisis states and calculate the maximum scale of annual FDI inflow in China. It finds out in the year 2020 the BOP crisis may occur in China.Finally , it raises some suggestions to reduce the potential risks, for example, to adjust the measure on China's use of FDI, to improve foreign exchange administration , to perfect the RMB exchange rate regime and to strengthen statistics on FDI.