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Abstract ： As FDI inflows in China grow fast， China has become the top developing country that attracts the largest amount of FDI. FDI makes an important contribution to the balance of payments. However， FDI inflows may bring potential risks in the long run. These risks in the current account， capital and financial account could have negative effects on the balance of payments. The purpose of this paper is to make it clear whether FDI inflows will cause China's balance of payments crisis. The conclusion is that FDI inflows has a positive effect on China's balance of payment at present， but it may bring potential risks in the long run.
Key words ： FDI， balance of payments， investment income.
1. Introduction
As a major part of investment， foreign direct investment （FDI） plays an important role in economic growth and it has increased more rapidly after 1980s. Due to the globalization of the world economy over past 30 years， most developing countries tend to take FDI as a driving force to stimulate economy. FDI can not only solve the difficulties of capital and technology that needed in the process of economic development， it also brings new jobs to a host country and increases the employment rate. In addition， it can improve the balance of payments through a substitute for imports and a rise in exports. All of these would stimulate competition， lower price and increase the consumers' welfare. However， it does not mean there is no risk in the introduction of FDI. Multinational enterprises may get subsidies from the host market and allow firms to monopolize the market. Moreover， they may transfer the earnings to home country， leading to a current account deficit of the host country. The issue of loss independence of economy by excessive introduction of FDI also has a significant negative impact on the macro economy.
2. Literature review
2.1 The positive effects
Some researchers may argue that FDI can improve trade surplus through import substitution effect and export oriented strategy. It is also more stable than other forms of financing and it is easy to be locked in the local economy. Thus it shows positive effects on balance of payments.
A famous research is the two-gap model which is proposed by H. Chenery and A.M. Strout （1966）. The two-gap model is that there are two gaps in developing countries which are domestic saving gap and trade gap， while foreign capital inflows can make up these two gaps to achieve balance of payments. It provides an important theoretical basis for developing countries to attract foreign investment， and thus foreign capital inflows are considered as an important way to achieve balance of payments. Some studies have showed， for developing countries， FDI is a more stable way to attract foreign capital compared with portfolio and foreign loans. They （Claessens and Mamingi， 1998； Sarno and Taylor， 1999） suggest that， When a host country facing a economic shock， if the main part of foreign capital is from borrowing， the country must take most of the burden themselves； if they introduce more FDI， asset prices can be adjusted and hence foreign investors may share some of the negative effects. Furthermore， FDI inflows bring capitals， and at the same time it is accompanied by the transfer of advanced technology and management concepts， which play an important role in economic growth and in long term development. Therefore， FDI is more beneficial than indirect investment in the economic growth and financial stability.
Moreover， Rui Albuquerque （2003） points out those developing countries that are in great needs of capital should finance more through FDI. Because FDI can share risks and require a low risk-free return. It is also not sensitive to financial changes. So it is a good way to finance in developing countries. Lipsey （2001） have studied the FDI in three financial crises in 1990s and he believes that FDI is a long term investment， including specific production equipments and other facilities. Once the investment is completed， physical assets can not be easily moved. FDI may deeper integrate with the host country's social economy， which is locked. It is more stable compared with other forms of foreign capital.
2.2 The negative effects
However， there are some literatures considering that FDI has a negative impact on the balance of payments， and it is even to be thought as one of the factors that causes the international balance of payments crisis.
The opinion of negative effects on balance of payments can date back to Thomas Mun （1664）， the main representative of mercantilism， who argues that capital inflows will not generate a real balance of payments surplus， nor bring real wealth growth. Because capital inflows will withdraw when ones obtain enough returns， hence it is recognized that foreign capital would go against the balance of payments in a long period. Kalechi （1966） has done a research on FDI profits affecting host country's balance of payments. In his model， there are two ways affecting the balance of payments， the one is FDI causing capital inflows， the other is FDI causing profits outflows. If there are a large proportion of profits escaping and host country maintains net foreign investment inflows unchanged， the total investments must increase in order to slow down the profit remittances. When the amount of profit remittances exceeds the number of trade surplus， the current account will have a deficit. As long as the net foreign capital inflows lower the amount of profit remittances， a country's foreign exchange reserves will decline， thus affecting a country's balance of payments. If the net rate of returns and rate of profit remittance stay unchanged， the balance of payments deficit would be hard to avoid. Baran （1973） also shows the same point as Kalecki， he suggests that profits outflows and increasing proportion of license fees， making developing countries tend to depend on traditional export sector and foreign capital inflows， thus foreign capital inflows will increase the external vulnerability of developing countries. Researchers in the UNCTAD （2002） argue that FDI is essentially a kind of debt and the profit is one form of interest. It tends to require a higher rate of return and may change host countries' economies after a few years， while the profits will remit gradually from the host countries. Woodward （2001） also points out that the nature of FDI and the nature of other forms of foreign capital inflows are the same， making profits. Profit remittances will bring the balance of payments negative effects， or even leading to financial crises.
Dooley et al. （1994） argue that FDI may not be locked， although the plants and equipments are not easy to flow， investors can take their assets as collateral to obtain loans in the host country and then flow out by other forms. Besides， multinational companies can be more easily to get money through internal channels of subsidiaries and the parent company than to get money though the external market. Krugman （1998） finds that FDI flows in large scale during the financial crisis or in the post-crisis period. Industrial investment funds， representatives of the international capital， take over large numbers of enterprises which are in liquidity crisis. Once the economic situation has improved and asset price has went up， foreign investors are likely to sell the acquired enterprises at premium， as Krugman called "fire sale". From 1996 to 1998 during the Southeast Asian financial crisis， the number of foreign mergers and acquisitions had increased 91%， while the number of domestic mergers and acquisitions decreased 27%. This may prove that large scale inflows and outflows of FDI go against the financial stability in developing countries.
3. Analysis
3.1 The current situation of FDI and balance of payments in China
As the inflows of FDI in China grow fast， China has become the top country that attracts the largest amount of FDI. China has joined the WTO by the end of 2001 and brought a new tide of attracting FDI. As the restrictions to FDI reduce， foreign investments maintain a rapid growth. Cross-border mergers and acquisitions， share transfers and other forms of investment have gradually become important ways. In 2002， FDI in China reaches $52.74 billion and ranks first in the world. In 2011， the gross amount of FDI has risen to $116.01 billion and has maintained the first place for 17 years in developing countries. From the source of FDI， non-financial sector is more concentrated， which the top three places are Hong Kong， Taiwan， Singapore. From the investment industry， the top three sectors attracting FDI are manufacturing， real estate， renting and service， while FDI in financial sectors focuses on banking. From the investment area， the eastern and coastal areas of China are the main regions of FDI inflows， while FDI in the western region of China also grows quickly.
3.2. Potential risks of balance of payments on FDI
A. Current account
In recent years， current account surplus and FDI have increased rapidly. As China's huge market and cheap labor， foreign enterprises prefer the prospect of long-term development. FDI brings advanced technology and employment opportunities， and it also promotes the economic development. For these reasons， the amount of FDI inflows in China maintains a steady growth for many years （Figure 3）. Therefore， from the respect of trade surplus and foreign-funded enterprises increasing， there will not be worsening of trade surplus， or balance of payments deficit.
However， FDI has become a major form of financing for most exported-oriented enterprises， and it plays an important role in current account surplus. The exports of foreign-invested enterprises accounted for more than half of China's total exports after 2001①， and the trade surplus has been a major part of the current account surplus. In other words， foreign investments account for a large proportion in the economy especially in the manufacturing industry， which control the main part of exports. When facing economic crisis， these enterprises may disinvest or withdraw their investment， resulting in current account deficit. If current account changes from surplus to deficit in export-oriented economies， it will be the opportunity for international speculative capital attacking. As Dooley et al. （1994） point out FDI may not be locked in the host country. The multinational companies can mortgage their plants and equipments to get money from the host country's bank and withdraw their investment by related party transactions. So the risks are transferred to the host country's bank. Besides， in the early stage of economic crisis， there are lots of signs that large amounts of funds crowed into the stock market and real estate market. The disconnection of foreign capital and the real economy will bring great economic uncertainty.
Moreover， in the recent years， the structure of FDI may have changed. According to the Figure 1， the main part of FDI is focus on the secondary industry and tertiary industry. FDI in secondary industry is much more than that in the tertiary industry before 2004. But after 2005， the secondary industry tends to go down， while the tertiary industry continues to rise which accounts for over 50% in 2011. As we all know， in China the secondary industry mostly refers to the manufacturing industry for its government policy to FDI. From the investment structure in Figure 2， it is obvious that FDI reduces in the manufacturing of the secondary industry and rises in the real estate of the tertiary industry. FDI are likely to invest into the real estate market and hence manufacturing tends to decrease. When economic crisis coming， trade account surplus may decline and profits will easily go back to the home country. It means the further relationship between capital and real economy is likely to worsen the balance of payments as well as the economy. Therefore， the direction of FDI inflows in China may be the potential risks in the long run. Figure 1. China： FDI shares in the three major industries in 2000-2011.
Source： Ministry of Commerce of China website： www.mofcom.gov.cn.
Figure 2. China： FDI shares in manufacturing industry and real estate.（下圖）
Source： Ministry of Commerce of China
website： www.mofcom.gov.cn.
From the view of balance of payments， it is considered that the rapid development of China is attributed to the full use of FDI. China has been the most appealing country in attracting FDI for 13 years because of the huge market and cheap labor. The cumulative amount of FDI has reached $1164.39 billion by the end of 2011②， and it generates high profits every year. While the main part of China's foreign exchange reserves are U.S. Treasury bonds and the returns are only 3%-5%. The ownership of the profits of FDI belongs to foreign companies， while the forms are the RMB. According to the rules of international balance of payments， this part of funds can withdraw unconditionally into foreign currency at any time. In the international capital flows， FDI is often considered as one of the stable， non-speculative investment. But the retained profits in China are significant speculative， especially in real estate market （Figure 2）. The growth of retained profits may affect the stability of current account and it may bring the long-term risks to China's economy.
Figure 3. China： actual utilization of FDI and investment income remittance in 2000-2011.
Source： Ministry of Commerce of China website： www.mofcom.gov.cn； State Administration of Foreign Exchange of China website： www.safe.gov.cn.
Figure 4. China： trade surplus and FDI returns in 2005-2011.（右图）
Source： China statistical yearbook 2005-2011③.
In addition， although most of FDI returns in this period are reinvested in China， the amount of investment income remittance is increasing. Currently， the annual amount of investment income remittance has exceeded actual utilization of FDI （Figure 3）， and it is just one part of the FDI returns. We can use the return on capital of foreign invested industrial enterprises to estimate the FDI returns （Figure 4）. In Figure 4， it can be found that FDI returns have been increasing while trade surplus begins to decline. If foreign investors remit the profits in group， China has to use more than half of the trade surplus to pay for the debts. It will undoubtedly put pressure on China's international balance of payments. As David Woodward （2001） points out， the fundamental purpose of the capital is to make profits. When the profits fall， FDI will go back to the home country. Although earnings of FDI are reinvested at this stage， the repatriation of profits is inevitable. So FDI may have an issue of pre-capital inflows and post-capital outflows. Reinvestment of profits does not change the essence of this problem， but only delay the remittance time. In that time， the repatriation of profits may be more concentrated， the amount may grow bigger. When the appreciation and expected revaluation of RMB is over， FDI retained profits will greatly withdraw. At that time， its huge size and unrestricted property will shock the safety of China's balance of payments. B. Capital and financial account
Currency free convertibility is divided into current account convertibility and capital and financial account convertibility. For economic security， current account opens free convertibility first， and then capital and financial account opens when it qualifies conditions. When opening the capital and financial account convertibility， foreign capitals will be more convenient to flow. Although capital and financial account openness and current account openness do not have the connection， the current account openness will be helpful to reduce the impact of capital flows. Capital and financial account openness will provide a convenient way for FDI outflows. The capital and financial account openness should satisfy some requirements， such as healthy macroeconomic environment， stable financial system， current account balance， equilibrium exchange rate， etc. If a country opens the capital and financial account without qualified conditions， it may encourage monitoring FDI inflows， or even resulting in FDI outflows.
With the size of FDI and foreign trade expanding， China never loses the control of capital flows. Even after the free convertibility of RMB in current account in 1994， capital and financial account continues to strictly control. It is always considered that this financial system helps China successfully resist the negative chain effect of Southeast Asian financial crisis in 1997-1998 （Ariyoshi， et al， 2001）. From this view， with the strictly control of capital and financial account， it is safe to maintain the balance of payments.
However， with large amount of FDI inflows， the outflows of FDI tend to be greater especially after 2009. In 2009， FDI outflows has increased 144.6% and reached $31.8 billion. It then goes up to $34.1 billion in 2011. Besides， after the empirical study on effectiveness of capital controls， they question the capital controls （Dooley et al.， 1996）. They argue that， capital controls can effectively prevent capital flight in the short term， but the effectiveness of capital controls is poor in the long run. Moreover， with the deepening of financial reform， China has introduced the QFII system. In fact， it is a restrictive openness of stock market. But it becomes the second-largest institutional investors in the A-share market in China in 2006 and investment quota has increased to $10 billion in 2009. China continues to relax restrictions on capital and financial account liberalization. It should also consider the impact of FDI outflows. The development of openness level of China will be the potential risks in terms of FDI in the long run. Meanwhile， because of China's huge amounts of trade surplus and the introduction of FDI， China's international balance of payments increase rapidly. To control the balance of payments surplus， the government has to take the write-off policy， which may restrain the domestic investment. In the open economy， FDI inflows result in foreign exchange reserves increasing， thus under the write-off policy， money supply generates the pressure of inflation. The central bank has to tight domestic credits to restrain the expansion of domestic money supply， which limits the domestic enterprises investment （Yao， Z.， and He， F.， 2004）. In fact， it is a kind of substitution and crowding out effects to domestic capital， so that the level of domestic investment would decline. While the foreign-funded enterprises and joint ventures can get funds beyond the control of central bank. The tight credit shows no effects to the foreign investment continuity， but domestic enterprises with no FDI source have to reduce investments. Therefore， foreign-funded enterprises may expand the domestic market share， resulting in follow-up obstacles for domestic enterprises.
4. Conclusion
This paper analyzes the situation of balance of payments and utilization of FDI in China， pointing out the potential risks of balance of payments on FDI. FDI makes an important contribution to the rapid growth of China's economy. It will show a positive effect on the balance of payments in the short term， but it may change into a negative effect in the long run. China has maintained the current account surplus and capital account surplus for 13 years. FDI inflows tend to increase every year. The government continues to implement capital account controls. China's foreign exchange reserves have reached over $3000 billion. All of these will protect the stability of balance of payments and sustainable economic development.
However， there may be some potential risks of China's balance of payments. In the current account， the amount of total FDI generates huge profits every year which are the retained profits. These profits are unstable and speculative when the economy is overheating. Besides， FDI inflows tend to invest into the real estate market and the investment in manufacturing declines， which is not good for the exports and trade surplus. In the capital and financial account， capital account controls can be effective to protect the balance of payments in the short term instead of the long run. In addition， FDI inflows may reduce the domestic investment for the increasing interest rates. 注释
①It is calculated from China customer
statistic. In 2001， the proportion is 50.06%； in 2011 it is 52.43%.
②Utilization of Foreign Capital Table， China Statistical Yearbook 2012.
③FDI returns are estimated from key indicators of foreign invested industrial enterprises， where return on capital = return on FDI. Return on capital = [total profit * （1-33%） / total owners' equity] *cumulative utilization of FDI （before 2007）， Return on capital = [total profit * （1-25%） / total owners' equity] *cumulative utilization of FDI （after 2008）.
References
Ariyoshi， A.， Habermeier， K.， Lauren， B.， et al （2001）. Capital Controls： Country Experiences with Their Use and Liberalization， IMF Occasional Paper 190 （Washington： International Monetary Fund）.
Baran， P. （1973）. The Political Economy of Growth. Harmondsworth： Penguin.
Chenery， H. and A. Strout （1966）. Foreign Assistance and Economic Development. American Economic Review， September， 679-733.
Dooley， et al. （1994）. Recent Private Capital Inflows to Developing Countries： Is the Debt Crisis History？ NEBR Working Paper， 4972.
Dooley， M. P. （1996）. Capital Flight： A Response to Differences in Financial Risks. IMF Staff Paper 35（3）， 23-30.
Kalecki， M. and Sachs， I. （1966）. Forms of Foreign Aid： An Economic Analysis， Reprinted in Collected Works of Michael Kalecki， Vol V， Developing Economics， ED By Jerzy Osiatynski， Transl. by Chester Adam Kisiel. Oxford： Clarendon Press， 1993， 61-91.
Krugman， P. （1998）. Fire-sale FDI. http：// web.mit.edu/krugman/www/firesale.htm （for NBER Conference on Capital Flows to Emerging Markets， Feb. 20-21， 1998）.
Lipsey， E. R. （2001）. Foreign Direct Investment in Three Financial Crises. NBER Working Paper， 8084.
Mun， T. （1664）. England's Treasure by Foreign Trade. Kessinger Publishing， LLC.
Rui Albuquerque （2003）.The Composition of International Capital Flows： Risk Sharing Through Foreign Direct Investment .Journal of International Economics， 61， 353-383.
UNCTAD （United Nations Conference on Trade and Development）， （2002）. Trade and Development Report 2002， United Nations ， New York and Geneva.
Woodward， D. （2001）. The Next Crisis？ Direct and Equity Investment in Developing Countries. Zed Books， New York.
Yao， Z.， and He， F. （2004）. Will FDI Cause Balance of Payments Crisis？ Economic Research. Vol. 11， 37-46.
（作者單位：中国人民银行沈阳分行）
Key words ： FDI， balance of payments， investment income.
1. Introduction
As a major part of investment， foreign direct investment （FDI） plays an important role in economic growth and it has increased more rapidly after 1980s. Due to the globalization of the world economy over past 30 years， most developing countries tend to take FDI as a driving force to stimulate economy. FDI can not only solve the difficulties of capital and technology that needed in the process of economic development， it also brings new jobs to a host country and increases the employment rate. In addition， it can improve the balance of payments through a substitute for imports and a rise in exports. All of these would stimulate competition， lower price and increase the consumers' welfare. However， it does not mean there is no risk in the introduction of FDI. Multinational enterprises may get subsidies from the host market and allow firms to monopolize the market. Moreover， they may transfer the earnings to home country， leading to a current account deficit of the host country. The issue of loss independence of economy by excessive introduction of FDI also has a significant negative impact on the macro economy.
2. Literature review
2.1 The positive effects
Some researchers may argue that FDI can improve trade surplus through import substitution effect and export oriented strategy. It is also more stable than other forms of financing and it is easy to be locked in the local economy. Thus it shows positive effects on balance of payments.
A famous research is the two-gap model which is proposed by H. Chenery and A.M. Strout （1966）. The two-gap model is that there are two gaps in developing countries which are domestic saving gap and trade gap， while foreign capital inflows can make up these two gaps to achieve balance of payments. It provides an important theoretical basis for developing countries to attract foreign investment， and thus foreign capital inflows are considered as an important way to achieve balance of payments. Some studies have showed， for developing countries， FDI is a more stable way to attract foreign capital compared with portfolio and foreign loans. They （Claessens and Mamingi， 1998； Sarno and Taylor， 1999） suggest that， When a host country facing a economic shock， if the main part of foreign capital is from borrowing， the country must take most of the burden themselves； if they introduce more FDI， asset prices can be adjusted and hence foreign investors may share some of the negative effects. Furthermore， FDI inflows bring capitals， and at the same time it is accompanied by the transfer of advanced technology and management concepts， which play an important role in economic growth and in long term development. Therefore， FDI is more beneficial than indirect investment in the economic growth and financial stability.
Moreover， Rui Albuquerque （2003） points out those developing countries that are in great needs of capital should finance more through FDI. Because FDI can share risks and require a low risk-free return. It is also not sensitive to financial changes. So it is a good way to finance in developing countries. Lipsey （2001） have studied the FDI in three financial crises in 1990s and he believes that FDI is a long term investment， including specific production equipments and other facilities. Once the investment is completed， physical assets can not be easily moved. FDI may deeper integrate with the host country's social economy， which is locked. It is more stable compared with other forms of foreign capital.
2.2 The negative effects
However， there are some literatures considering that FDI has a negative impact on the balance of payments， and it is even to be thought as one of the factors that causes the international balance of payments crisis.
The opinion of negative effects on balance of payments can date back to Thomas Mun （1664）， the main representative of mercantilism， who argues that capital inflows will not generate a real balance of payments surplus， nor bring real wealth growth. Because capital inflows will withdraw when ones obtain enough returns， hence it is recognized that foreign capital would go against the balance of payments in a long period. Kalechi （1966） has done a research on FDI profits affecting host country's balance of payments. In his model， there are two ways affecting the balance of payments， the one is FDI causing capital inflows， the other is FDI causing profits outflows. If there are a large proportion of profits escaping and host country maintains net foreign investment inflows unchanged， the total investments must increase in order to slow down the profit remittances. When the amount of profit remittances exceeds the number of trade surplus， the current account will have a deficit. As long as the net foreign capital inflows lower the amount of profit remittances， a country's foreign exchange reserves will decline， thus affecting a country's balance of payments. If the net rate of returns and rate of profit remittance stay unchanged， the balance of payments deficit would be hard to avoid. Baran （1973） also shows the same point as Kalecki， he suggests that profits outflows and increasing proportion of license fees， making developing countries tend to depend on traditional export sector and foreign capital inflows， thus foreign capital inflows will increase the external vulnerability of developing countries. Researchers in the UNCTAD （2002） argue that FDI is essentially a kind of debt and the profit is one form of interest. It tends to require a higher rate of return and may change host countries' economies after a few years， while the profits will remit gradually from the host countries. Woodward （2001） also points out that the nature of FDI and the nature of other forms of foreign capital inflows are the same， making profits. Profit remittances will bring the balance of payments negative effects， or even leading to financial crises.
Dooley et al. （1994） argue that FDI may not be locked， although the plants and equipments are not easy to flow， investors can take their assets as collateral to obtain loans in the host country and then flow out by other forms. Besides， multinational companies can be more easily to get money through internal channels of subsidiaries and the parent company than to get money though the external market. Krugman （1998） finds that FDI flows in large scale during the financial crisis or in the post-crisis period. Industrial investment funds， representatives of the international capital， take over large numbers of enterprises which are in liquidity crisis. Once the economic situation has improved and asset price has went up， foreign investors are likely to sell the acquired enterprises at premium， as Krugman called "fire sale". From 1996 to 1998 during the Southeast Asian financial crisis， the number of foreign mergers and acquisitions had increased 91%， while the number of domestic mergers and acquisitions decreased 27%. This may prove that large scale inflows and outflows of FDI go against the financial stability in developing countries.
3. Analysis
3.1 The current situation of FDI and balance of payments in China
As the inflows of FDI in China grow fast， China has become the top country that attracts the largest amount of FDI. China has joined the WTO by the end of 2001 and brought a new tide of attracting FDI. As the restrictions to FDI reduce， foreign investments maintain a rapid growth. Cross-border mergers and acquisitions， share transfers and other forms of investment have gradually become important ways. In 2002， FDI in China reaches $52.74 billion and ranks first in the world. In 2011， the gross amount of FDI has risen to $116.01 billion and has maintained the first place for 17 years in developing countries. From the source of FDI， non-financial sector is more concentrated， which the top three places are Hong Kong， Taiwan， Singapore. From the investment industry， the top three sectors attracting FDI are manufacturing， real estate， renting and service， while FDI in financial sectors focuses on banking. From the investment area， the eastern and coastal areas of China are the main regions of FDI inflows， while FDI in the western region of China also grows quickly.
3.2. Potential risks of balance of payments on FDI
A. Current account
In recent years， current account surplus and FDI have increased rapidly. As China's huge market and cheap labor， foreign enterprises prefer the prospect of long-term development. FDI brings advanced technology and employment opportunities， and it also promotes the economic development. For these reasons， the amount of FDI inflows in China maintains a steady growth for many years （Figure 3）. Therefore， from the respect of trade surplus and foreign-funded enterprises increasing， there will not be worsening of trade surplus， or balance of payments deficit.
However， FDI has become a major form of financing for most exported-oriented enterprises， and it plays an important role in current account surplus. The exports of foreign-invested enterprises accounted for more than half of China's total exports after 2001①， and the trade surplus has been a major part of the current account surplus. In other words， foreign investments account for a large proportion in the economy especially in the manufacturing industry， which control the main part of exports. When facing economic crisis， these enterprises may disinvest or withdraw their investment， resulting in current account deficit. If current account changes from surplus to deficit in export-oriented economies， it will be the opportunity for international speculative capital attacking. As Dooley et al. （1994） point out FDI may not be locked in the host country. The multinational companies can mortgage their plants and equipments to get money from the host country's bank and withdraw their investment by related party transactions. So the risks are transferred to the host country's bank. Besides， in the early stage of economic crisis， there are lots of signs that large amounts of funds crowed into the stock market and real estate market. The disconnection of foreign capital and the real economy will bring great economic uncertainty.
Moreover， in the recent years， the structure of FDI may have changed. According to the Figure 1， the main part of FDI is focus on the secondary industry and tertiary industry. FDI in secondary industry is much more than that in the tertiary industry before 2004. But after 2005， the secondary industry tends to go down， while the tertiary industry continues to rise which accounts for over 50% in 2011. As we all know， in China the secondary industry mostly refers to the manufacturing industry for its government policy to FDI. From the investment structure in Figure 2， it is obvious that FDI reduces in the manufacturing of the secondary industry and rises in the real estate of the tertiary industry. FDI are likely to invest into the real estate market and hence manufacturing tends to decrease. When economic crisis coming， trade account surplus may decline and profits will easily go back to the home country. It means the further relationship between capital and real economy is likely to worsen the balance of payments as well as the economy. Therefore， the direction of FDI inflows in China may be the potential risks in the long run. Figure 1. China： FDI shares in the three major industries in 2000-2011.
Source： Ministry of Commerce of China website： www.mofcom.gov.cn.
Figure 2. China： FDI shares in manufacturing industry and real estate.（下圖）
Source： Ministry of Commerce of China
website： www.mofcom.gov.cn.
From the view of balance of payments， it is considered that the rapid development of China is attributed to the full use of FDI. China has been the most appealing country in attracting FDI for 13 years because of the huge market and cheap labor. The cumulative amount of FDI has reached $1164.39 billion by the end of 2011②， and it generates high profits every year. While the main part of China's foreign exchange reserves are U.S. Treasury bonds and the returns are only 3%-5%. The ownership of the profits of FDI belongs to foreign companies， while the forms are the RMB. According to the rules of international balance of payments， this part of funds can withdraw unconditionally into foreign currency at any time. In the international capital flows， FDI is often considered as one of the stable， non-speculative investment. But the retained profits in China are significant speculative， especially in real estate market （Figure 2）. The growth of retained profits may affect the stability of current account and it may bring the long-term risks to China's economy.
Figure 3. China： actual utilization of FDI and investment income remittance in 2000-2011.
Source： Ministry of Commerce of China website： www.mofcom.gov.cn； State Administration of Foreign Exchange of China website： www.safe.gov.cn.
Figure 4. China： trade surplus and FDI returns in 2005-2011.（右图）
Source： China statistical yearbook 2005-2011③.
In addition， although most of FDI returns in this period are reinvested in China， the amount of investment income remittance is increasing. Currently， the annual amount of investment income remittance has exceeded actual utilization of FDI （Figure 3）， and it is just one part of the FDI returns. We can use the return on capital of foreign invested industrial enterprises to estimate the FDI returns （Figure 4）. In Figure 4， it can be found that FDI returns have been increasing while trade surplus begins to decline. If foreign investors remit the profits in group， China has to use more than half of the trade surplus to pay for the debts. It will undoubtedly put pressure on China's international balance of payments. As David Woodward （2001） points out， the fundamental purpose of the capital is to make profits. When the profits fall， FDI will go back to the home country. Although earnings of FDI are reinvested at this stage， the repatriation of profits is inevitable. So FDI may have an issue of pre-capital inflows and post-capital outflows. Reinvestment of profits does not change the essence of this problem， but only delay the remittance time. In that time， the repatriation of profits may be more concentrated， the amount may grow bigger. When the appreciation and expected revaluation of RMB is over， FDI retained profits will greatly withdraw. At that time， its huge size and unrestricted property will shock the safety of China's balance of payments. B. Capital and financial account
Currency free convertibility is divided into current account convertibility and capital and financial account convertibility. For economic security， current account opens free convertibility first， and then capital and financial account opens when it qualifies conditions. When opening the capital and financial account convertibility， foreign capitals will be more convenient to flow. Although capital and financial account openness and current account openness do not have the connection， the current account openness will be helpful to reduce the impact of capital flows. Capital and financial account openness will provide a convenient way for FDI outflows. The capital and financial account openness should satisfy some requirements， such as healthy macroeconomic environment， stable financial system， current account balance， equilibrium exchange rate， etc. If a country opens the capital and financial account without qualified conditions， it may encourage monitoring FDI inflows， or even resulting in FDI outflows.
With the size of FDI and foreign trade expanding， China never loses the control of capital flows. Even after the free convertibility of RMB in current account in 1994， capital and financial account continues to strictly control. It is always considered that this financial system helps China successfully resist the negative chain effect of Southeast Asian financial crisis in 1997-1998 （Ariyoshi， et al， 2001）. From this view， with the strictly control of capital and financial account， it is safe to maintain the balance of payments.
However， with large amount of FDI inflows， the outflows of FDI tend to be greater especially after 2009. In 2009， FDI outflows has increased 144.6% and reached $31.8 billion. It then goes up to $34.1 billion in 2011. Besides， after the empirical study on effectiveness of capital controls， they question the capital controls （Dooley et al.， 1996）. They argue that， capital controls can effectively prevent capital flight in the short term， but the effectiveness of capital controls is poor in the long run. Moreover， with the deepening of financial reform， China has introduced the QFII system. In fact， it is a restrictive openness of stock market. But it becomes the second-largest institutional investors in the A-share market in China in 2006 and investment quota has increased to $10 billion in 2009. China continues to relax restrictions on capital and financial account liberalization. It should also consider the impact of FDI outflows. The development of openness level of China will be the potential risks in terms of FDI in the long run. Meanwhile， because of China's huge amounts of trade surplus and the introduction of FDI， China's international balance of payments increase rapidly. To control the balance of payments surplus， the government has to take the write-off policy， which may restrain the domestic investment. In the open economy， FDI inflows result in foreign exchange reserves increasing， thus under the write-off policy， money supply generates the pressure of inflation. The central bank has to tight domestic credits to restrain the expansion of domestic money supply， which limits the domestic enterprises investment （Yao， Z.， and He， F.， 2004）. In fact， it is a kind of substitution and crowding out effects to domestic capital， so that the level of domestic investment would decline. While the foreign-funded enterprises and joint ventures can get funds beyond the control of central bank. The tight credit shows no effects to the foreign investment continuity， but domestic enterprises with no FDI source have to reduce investments. Therefore， foreign-funded enterprises may expand the domestic market share， resulting in follow-up obstacles for domestic enterprises.
4. Conclusion
This paper analyzes the situation of balance of payments and utilization of FDI in China， pointing out the potential risks of balance of payments on FDI. FDI makes an important contribution to the rapid growth of China's economy. It will show a positive effect on the balance of payments in the short term， but it may change into a negative effect in the long run. China has maintained the current account surplus and capital account surplus for 13 years. FDI inflows tend to increase every year. The government continues to implement capital account controls. China's foreign exchange reserves have reached over $3000 billion. All of these will protect the stability of balance of payments and sustainable economic development.
However， there may be some potential risks of China's balance of payments. In the current account， the amount of total FDI generates huge profits every year which are the retained profits. These profits are unstable and speculative when the economy is overheating. Besides， FDI inflows tend to invest into the real estate market and the investment in manufacturing declines， which is not good for the exports and trade surplus. In the capital and financial account， capital account controls can be effective to protect the balance of payments in the short term instead of the long run. In addition， FDI inflows may reduce the domestic investment for the increasing interest rates. 注释
①It is calculated from China customer
statistic. In 2001， the proportion is 50.06%； in 2011 it is 52.43%.
②Utilization of Foreign Capital Table， China Statistical Yearbook 2012.
③FDI returns are estimated from key indicators of foreign invested industrial enterprises， where return on capital = return on FDI. Return on capital = [total profit * （1-33%） / total owners' equity] *cumulative utilization of FDI （before 2007）， Return on capital = [total profit * （1-25%） / total owners' equity] *cumulative utilization of FDI （after 2008）.
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（作者單位：中国人民银行沈阳分行）