International capital movement reflects the transnational transfer of various kinds of currency capital, merchandise capital and production capital aimed to realize certain economic object. Capital movement includes capital flowing out, i.e. capital of one country or region transfer into another country or region, and capital flowing in, i.e. capital flowing in from other country or region to the host country or region.

Realized transnational capital movement must possess capital supplier and demander at the same time, and must be a win-win deal for both of the capital supplier and demander. Therefore, it is mainly focused on the three aspects of capital supply, capital demand and the normal economic effect of capital movement to analyze the reason of international capital movement:

The normal economic effect of international capital movement can be quantified through Fig.1:

In Fig.1, ordinate V_1，V₂ represents the margin productivity of two countries. In order to facilitate the analysis, rotate vertical axle V₂O clockwise until these two ordinates piled up into Fig.1, then horizontal OO� represents the total capital supply of V₁ and V₂ , OA is the total domestic capital of V₁ and O�A is the total domestic capital of V_2. MPK_V1 and MPK_V2 represent the margin productivity of V₁ and V₂ respectively.

Prior to capital�s international movement, the margin return of capital in country V₁ is OC, total production output is OFGA, among it the part of rectangle OCGA indicates the income of capital, the remaining triangle CFG indicates the income of other factors. For country V₂, the margin return of capital is O�C, total production output is O�JMA, among it the part of rectangle O�HMA indicates the income of capital, the remaining triangle HJM indicates the income of other factors.

To sum up, capital�s international movement brings more reasonable capital allocation which will not only benefit the capital importing and exporting country, but also increase the total output of world economy. As shown above, the shadow part EGM in Fig.1 will be the net increasing on world economy provided that there is only V₁ and V₂ two countries in the world.

The above analysis is a static analysis with the using of reward descending law. As this analysis considers that the capital�s international movement will result in the equalization on productivity between capital importing and exporting countries, this point of view is not real. But as a quantified analysis method, it is worth to use as a reference.

After the Second World War, capital is relatively surplus due to the economic slowing down in major developed countries. The fiscal deficit of these US led western countries is growing up which increased their domestic currency supply. Together with the swift development of European currency market absorbed huge amount of international idle fund. Meanwhile, the implementation of floating exchange rate system starting from 70’s facilitated capital investment, urged the emerging of large amount of investment capital. Due to the above mentioned reasons, the scale of international capital supply greatly promoted which created the base for the swift development of international capital movement in post-war period.

For example, an enterprise has original assets of one million US dollars, with average annual return rate at 10%, to the end of the year, there will be a profit of 100 thousand US dollars.

If reinvest 100 thousand US dollars will profit 7000 US dollars, then the margin return rate is 7%. If deposit 100 thousand US dollars in bank have a interest of 9000 US dollars, so the margin return rate is 9%. Therefore, the enterprise may have a comparison on 7% margin return rate and 9% interest rate to finally decide whether to invest or not.

For the same reason, investor will also compare the margin return rate and margin interest rate of domestic investment with the margin return rate and margin interest rate of foreign investment to decide whether to carry out domestic investment or foreign investment. In case the margin return rate or margin interest rate of foreign investment is higher than domestic investment, investor may invest aboard.

After the Second World War, the development of international capital movement has an obvious feature, that is the swift development of double direction investment between Europe and America.

Maximum return theory can’t explain it because that is impossible to have contemporary increasing of investment from West Europe to America and from America to West Europe if the reason for capital movement is to seek higher margin return rate. Risk decentralization theory made special explanation to this phenomenon.

Risk decentralization theory believes: The reason for capital’s double direction movement is in the consideration of investment risk, as investor not only care the difference of margin return rate, but care more the safety and risk degree of capital. Investor is happy to see higher return, they are more pleasant to see high return with safety.

The reason for the swift development of double direction investment between Europe and America is to decentralize investors’ investment risks. Invest in different countries can avoid huge losses caused by certain single country’s economic, political change. That is the common say: do not put all the eggs in a single basket.

Due to the urgent capital demand of developing countries in order to accelerate native economic development, the capital demand side is mainly consist of developing countries. Therefore, analysis carried out at capital demand side to the reason of international capital movement is mainly aimed at developing countries.

Hallod –Doma Model is brought forward by Hallod of British and Doma of American almost at the same time in the 40’s of the 20^th century. This model is proposed based on Keynes’ income determining theory. Its algebra equation is:

G=S/K

Quantified economic analysis approved that higher domestic investment rate is highly related to higher domestic saving rate. It is better to say that Hallod –Doma Model is even more suitable for developing countries than for developed countries. The model shows that sustainable economic development can only rely on sustainable capital formation. The short of capital in developing countries is one of the most important issues for its economic development due the low income and little saving. Therefore, to accelerate economic development and technical advancement through the introduction of foreign capital is the only way to promote the formation of long-term domestic capital.

Based on time term, international capital movement can be divide into long-term capital movement and short-term capital movement. Long-term capital movement reflects to those flow in and flow out in transnational capital transfer with period longer than one year. Short-term capital movement reflects to those international capital movements with period longer than one year.

Long-term capital movement can be further divided into direct investment, security investment and international lending, etc.

Direct investment is a kind of foreign investment carried out by investors in the form of established foreign enterprises or contractual joint ventures with local capital, featured with the participation or control on the managing decision of related enterprises. Direct investment often associated with the transnational movement of production elements, including capital products (equipment, powerhouse and etc.), technology and patent, managing personnel and etc., therefore, direct investment reflect the movement of real capital which causing the change in resource allocation.

Direct investment can be further divided into official foreign direct investment and private foreign direct investment, among which the most common existed and with maximum influence on world economy is private foreign direct investment. The main body of oversea direct investment in private sector is multinational corporation. So called multinational corporation reflects to those companies operate, own or control production facilities in several foreign places.

1. The special advantage of direct investment

Generally, local company is in favor condition compared with foreign company under the same conditions as multinational corporation is located at foreign countries with high operation expenses. They need to pay high cost for transportation, communication, especially in case of misunderstanding with local partners. In order to overcome this inherent advantage of local company, enterprises with foreign direct investment must possess certain kind of special advantage which local company doesn't have. This special advantage is the competitive advantage owned by multinational corporation under incomplete competence condition:

Firstly, multinational corporation can fully take the advantage of international work dividing and it is possible to distribute different working procedures into the most suitable place for respective implementation based on the comparison on labor cost, material cost, transportation cost, market scale, tax cost as well as risk statue. Therefore, maximum economic benefit can be obtained.

Secondly, multinational corporation can fully take the advantage of technical monopoly. Based on the lift cycle theory of product, technical advantage can create larger economic return only in the innovating stage. Once a product reached its standardized stage, labor cost will gradually turn into predominant position. Through the internal technology transfusion from parent company to subsidiaries, the establishment of foreign subsidiaries will have the advantage both in new technology and low labor cost. Hence, to win obvious advantage in competition.

Thirdly, multinational corporation owns various kind of financing channels. The finance of routine commercial company is mainly come from its own capital and loans from native government authorities and finance sector. Besides these channels, multinational corporation has two additional channels: one is the fund source of the hosting country of subsidiaries, another is from international fund, i.e. borrowing from the third country or international fund market and international financing companies. The facility in financing will greatly promote its intrinsic advantage in competition naturally.

Finally, multinational corporation can easily get rid of various kinds of restrictions on international trade and fund movement. For instance, provided there is a difference on tax rate between the capital exporting country and the host country of a subsidiary, transferred pricing policy can be adopted in order to reduce the tax payment in utmost. In case there will be a change on the exchange rate between the capital exporting country and the host country, policy of advanced payment or postponed payment can be adopted to obtain additional return.

2. Economic impact of direct investment

Direct foreign investment is always a sensible issue in its history. For example, British and the United States often lay down restrictions on capital flowing out due to the press of international balancing. Japan, West Europe and Canada enhance domestic control by restricting foreign investment. Most of developing countries have both worries on the condition of with foreign investment and without foreign investment, as they are worry about being controlled by capital exporting party in one hand, they also worry without sufficient foreign capital and technology in another hand. These worries should have their reasons. Because international direct investment will not only result in benefit from the proper allocation of two countries' resources like normal capital movement, but also cause some negative economic impact.

In the following paragraphs, we will discuss the benefits and losses caused by international direct investment in view of investing country (indigenous country) and invested country (host country of subsidiary).

In view of the indigenous country, investing aboard will cause fund flowing out in short-term which is unfavorable for international balancing. After a certain time, the flowing back of various kinds of return from oversea investment will be in favor of international balancing. The oversea investment of multinational corporation will bring a large part of domestic commodity flowing from parents company to subsidiaries, such as capital equipment, components, raw material and final products which is surely favorable for the economic growing of the indigenous country. But the flowing out of production capital may worsen domestic employment. Technical flowing out may cause the loss of technical advantage, the flowing back of investment return may increase the demand on importing commodities. All of these are obviously unfavorable for the economic growing of the indigenous country. To sum up, it is commonly believed that oversea investment of multinational corporation is in favor of international balancing and the economic growing of the indigenous country, especially in aspect of export stimulating.

For the host country, the flowing in of foreign capital is favorable for short-term international balancing. But in long term, the capital of remitting out of the subsidiaries of multinational corporation will certainly beyond the capital brought in, and normally the gaining of multinational corporation may always exceed the gaining of the host country. This will bring unfavorable impacts to international balancing. In addition, multinational corporation will not promote export painstakingly. As the production of multinational corporation is planned in a globe view, export will not follow the willing of host country, but its globe objective. Foreign investment may bring some indirect benefit to the host country, such as training of worker, promotion on managing level, learning and imitation of foreign advanced technology to improve the national income. The increasing of national income will further stimulate the domestic saving and the capital formation. This is favorable for the economic development of the host country. However, multinational corporation normally is merely aiming at self-interest and regardless the local interest, merely with concerns on production with cheap labor and materials so that to obtain high profit regardless the harmony of local economic structure, technical advancement and environment pollution. All of these are unfavorable for the economic development of the host country. To sum up, whether direct foreign investment is favorable for the international balancing and economic development of the host country or not is depend on the detail of different countries, especially the supervision level of the government of host country on foreign capital.

Due to the possible negative economic impact from foreign investment, it is necessary for the government of host country to carry out some restricting policies in view of its native interest. But in recent years, many countries have gradually reduced or released their control on it. This is an indication that the managing level on direct foreign investment is gradually improved and matured.

1. Security Investment

Security investment is carried out through manners of purchasing middle and long-term security on international bond market or the purchasing of stocks of listed foreign enterprises by the investor. As there is no investor's participation the operation and management of enterprise, and normally without control right on the enterprise, it is a kind of indirect investment in fact.

International security investment can be carried out both in aboard, i.e. the purchasing of stocks and bonds on foreign financial market (oversea international security), and in domestic, i.e. the purchasing of foreign security on domestic financial market (domestic international security). Through the purchasing of international security, investor gains profit proportion to its risk during the possessing period of security.

1. Features on international security investment

Same as direct investment, the final objective of security investment is to increase the value of assets. And once the possessed stock of an enterprise exceeded a certain limit, security investment will be deemed as direct investment. In the United States, it is sufficient to satisfy the official definition of direct investment once possessed with 10% share right of an enterprise. But compared with direct investment, security investment has its own features:

1. The manner of security investment is to purchase stock and bond, therefore, it reflects no real movement of capital as in direct investment;
2. Security investment can be carried out domestically, and direct investment must be done with multination;
3. Security investment is more flexible, investment can be recovered by the transfer of the possessed security freely. The profit return of direct investment existed in the form of fixed asset requires a certain time;
4. Security investment is easy to carry out with less restriction. Direct investment is complicated in formality and is interfered by the government of host country in a certain degree.

Direct investment covered the objects in a wide area. All kinds of government organizations, state-owned as well as private enterprises may issue or purchase security on the international security market. The return of security investment is allocated in the forms of interest, dividend and bonus of bond and stock. However, in case someone's purchasing of security is not aimed at annual dividend but aimed at the price fluctuation of trade, and to profit from short-term venture transaction, then, this part of capital movement is no longer belongs to long-term capital movement.

1. The function of international security investment

Security investment, as a kind of long-term international movement, has obvious effect on three aspects:

1. It is favorable for the regulation of international balancing. Country with trade deficit can solved difficulty in international payment through the issuing of government bond. Country with surplus can profit from long term arrangement with surplus fund to purchase foreign security.
2. Maintaining the mechanism of exchange rate through the trade of government bond. Under Bretton Woods system, government or central bank of various countries always interfere foreign exchange market in case of risk of US dollar through bulk buying in US dollar and investing most part on the bond of US government.
3. Promoted the development of new industry, as well as the growing of some other domestic and foreign industries. After the Second World War, the scale of enterprise in various countries swiftly expanded, many new industrial departments such as chemistry, electronic, energy, light texture, construction and etc. growing up resulted in the dramatically increasing of demand on capital. Therefore, the circulation volume of its stock and bonds abruptly increased.

In addition, the boost of security investment on international movement of long-term capital enhanced the capital export toward developing countries. Thousand billions of international capital turns to the major capital sources for the development of many countries.

1. International Lending

International lending mainly includes one year longer government bond, loan from international financial institutes and international banks, as well as leasehold credit, middle and long-term export credit, etc.

Leasehold credit is a kind of credit provided in the form of reality where lessor purchases the leaseholder required foreign machine and equipment by currency capital, and the leaseholder pays reprise to the lessor to acquire equipment access rights according to deed signed by both parties.

International leasehold provides 100% financing with relative long period and fixed interest rate, therefore possesses with certain attraction.

1. Short-term Capital Movement

Short-term capital movement reflects to those international capital movements with period less than one year. Major categories include trade fund movement, bank fund movement, value reserving type of capital movement and venture capital movement.

1. Trade fund movement

Currency fund moving from one country or region to another country or region happened during the discharge and settle up of debt and credit in international trade is not the movement of trade fund. This kind of currency fund movement caused by international trade plays an important role in short-term capital movement.

2. Bank fund movement

It is a kind of capital movement caused by the frequent fund dispatching between professional foreign exchange banks of various countries.

Frequent foreign exchange movement and short-term borrowing, payment and settle up of international transaction on inter-bank business carried out by banks dealing with foreign exchange business in various countries based on the business requirement will all result in short-term international capital movement.

3. Value reserving type of capital movement

It reflects to those international capital mobilization carried out by its possessor aiming at short-term capital safety. This type of capital movement also called capital escape.

4. Venture capital movement

It is a kind of short-term capital movement caused by speculator’s venture activities aimed to profit from the fluctuation of international market. The fluctuation of international market is mainly reflected on the variation of market exchange rate, interest rate, capital price as well as security price.

International capital movement may also result in negative impact on world economy:

1. Short-term movement of venture capital may cause confusion in currency and finance fields

Due to the difference on the exchange rate and interest rate in different countries, together with the finance innovation and development of modern communication technology, a puny rate difference may result in the frequent movement of large scaled short-term venture capital, and disturbing the normal economic and finance order of some countries. The Southeast Asian financial crisis in 1997 is very good example. Since the 90’s, Southeast Asian countries carried out financial freedom one after another, but without effective management on capital market. They rely on large quantity of foreign capital in long-term to drive the economic development, but the government without proper use of domestic capital. Together with singular native export structure, weak competitive force, and the declining on export and foreign exchange gaining, Southeast Asian countries turned to the best attacking target of international foreign exchange speculators due to their common shortage on the repertory of foreign exchange. Although Southeast Asian financial crisis has its inherent reasons, it is closely related to the international venture capital.

In view from the capital importing countries, except direct investment, the rest of capital importation all require the repayment of principle and interest. In case the total amount of foreign debt exceeded the withstanding ability, or without proper and effective use of foreign capital to improve debt repayment ability, the country may run into the difficulty of debt crisis. One of the reasons for the debt crisis in Latin American countries, such as Mexico in the middle of 80�s is excessive lending, low benefit from foreign debt and the poor government management on foreign debt.

1. Different attitudes on the management of international capital movement

Whereas the economic impact of international capital movement on a country is very complicated, there are two major attitudes on whether to control the import and export of international capital or not among state government and international institutes:

2. Manners and methods used to carry out management on international capital movement

The interest rate difference between countries is one of the key causes for international capital movement. If the policy on interest rate of each country can be accorded through coordination, the driving reason of international capital movement will be greatly eliminated. However, as an important lever in macro economic policy, interest rate is deemed as an important measure for economic regulation. Due to the unbalanced development on world economy, each country has different situation, to carry out favorable policy on interest rate based on the native benefit of each country is an inevitable trend. Coordination on the policy of interest rate is quite difficult. For instance in 1994, German adopted high interest rate in order to attract capital for the construction of East German and to limit the domestic inflation which resulted in a strong Mark and large fall down on British Pound and French Franc. German experienced contradiction with British and French, but German insisted on the interest rate eventually.

1. Features on China’s Utilization of Foreign Capital

Under the specified history condition in 60’s, “without debt both in domestic and aboard” is deem as the symbol of national strength and the requirement of independence in China. The necessity, possibility and the active function of using foreign capital is denied, especially in the period of “Culture Revolution”, the using of foreign capital is criticized as esteeming oversea and the sold of sovereignty which caused the isolation from international capital in China for a quite long period, the loss of possible conditions provided by modern economy, and the negative impact on economic development. The original narrowed distance with advanced countries in world is expanded again. Until the opening to outside in 1979, China just started actively and large scaled use of foreign capital.

Now China has entered WTO, the use of foreign capital, the participation in international competition, has turned into an important way to accelerate China’s economic development. Foreign capital, resources, technology, talent as well as private economy which serving as a favorable supplement all should be used by the country. The field of foreign capital utilization should also be enlarged. After the entering of WTO, Chinese government will adopt more flexible modes to continuously improve investment environment, to provide more convenient condition and sufficient legal protection on foreign investment and business operation. According to the industry guideline, to attract foreign investment actively, pilot foreign capital to mainly invest in infrastructures, fundamental industries and technical reformation of enterprises, in fund and technology concentrated industries, together with reasonable investment in the fields of finance, commercial, tourism and real estate.

Since the opening and reformation, the use of foreign capital has brought a serial of active impacts on the national economy of China:

Firstly, China focused the use of foreign capital in the weak sectors of national economy, especially on these key projects with large investment and long period, such as energy, railway, harbor and raw materials. The construction and completion of these projects have greatly promoted the national economic development.

Secondly, China has created a batch of foreign wholly owned, equity joint venture, contractual joint venture enterprises by the use of foreign capital, which not only produced many important commodities extremely shorted in China, but also learnt and introduced many advanced technology, equipment and management experiences. Many new technologies, new products have filled the domestic vacancy, which played an active role in the technical innovation and reformation of other enterprises.

Finally, the use of foreign capital in China not only solved the problems in weak sectors, learnt and introduced advanced technology, equipment and management, but also expanded the commodity export and the ability in gaining foreign exchange, created good condition for debt repayment and further expanding in the scale of foreign capital utilization. To sum up, the practicing on the use of foreign capital in China expressed that the use of foreign capital offset the capital shortage, introduced advanced technology and management, urged the adjustment of industry structure, expanded export, and enhanced the economic cooperation with foreign countries.

In the period of 1979-1992, indirect investment, i.e. international lending, dominated the use of foreign capital in China. In 1992, foreign direct investment exceeded foreign lending the first time. After that, direct investment gradually becomes the major form in the use of foreign capital in China. Up to now, China turns to be the fourth centralized country in international direct investment following the United States, European Union and Japan. The total amount of international direct investment stands the second in the world.

In China, the foreign investment on capital and technical concentrated projects as well as infrastructures is growing very fast. At the meantime of investing in coastal areas, the investment in the relative backward central and west regions also largely increased. Many well-known international companies have listed China as the key region for oversea investment based on recognition that China is an investment market with developing potential.

Both the scale and structure of China’s foreign debt are reasonable. Under the state macro regulation and control, the foreign lending and repayment runs into a good circulation which not only urged the successive improvement on national economic development and industry structure, but also maintained the good reputation of China in international financing. Meanwhile, the debt repayment indexes of China are all below the international warning line.

For example, based on the data in “Annual Statistic Book of China” published by China Statistic Press in 2001 we see the debt repayment rate is 6.7%, on due debt rate is 14.3% and total debt rate is 75% in 1996.

The following major problems are existed on China’s use of foreign capital:

1. Legal environment for foreign investment should be further improved

Due to the backward on the construction of China’s legal system, policy and legal regulations is lack of transparency. Same regulation may have different explanation on different place, different department, and on different object. In addition, the imperfect of China’s protection system on intellectual property rights resulted negative impact on the positivity of foreign investment.

2. The cost in absorbing foreign capital is relative high

Starting from 1994, the reserving of China in foreign exchange is kept on growing, and exceeded 200 billion US dollars up to now. The situation with huge idle in domestic capital raised the cost of using foreign capital. The common existed hungering for investment in China also raised the price of foreign capital. Meanwhile, due to the actual using rate of foreign investment is only about 50%, together with shoddy activities of reporting high price with low price, carried out by a few foreign investor, caused the cost in absorbing foreign capital is relative high.

3. The regional distribution and industry structure of foreign investment is not so reasonable

Foreign investment is mainly concentrated on consumption projects such as light textile and is unwilling to invest in projects with large investment, long repayment period and high risk. Foreign investor is also unwilling to invest in the central and west regions where the infrastructure and economic development is relatively backward.

The following major problems are existed on the international lending of China:

1. Increasing of foreign debt is too fast

From 1985 till now, the annual increasing on foreign debt is higher than 25%, which is far beyond the growing rate of GNP at the same period. For a developing country like China without perfect management system on foreign debt, growing too fast will increase the risk on debt repayment.

2. Imperfect system on foreign debt management

There are more than one window in charge of foreign debt management and the raising of foreign debt which is neither favorable for the control on the scale of foreign debt, nor for united state regulation and supervision.

Regarding the investing direction on the use of foreign debt, there are problems such as repeated construction, blind importation and over investment in consuming projects. For the investment in sectors such as energy, transportation and communication in using of foreign debt, problems such as short in domestic associated fund, bad purchasing quality, heavy waste and poor project quality, and so on not only decreased the investment benefit, but also hurt the passion of foreign investor.

1. The scale of foreign capital should accord with the domestic economic development

The fundamental objective on the scale control is to ensure the economic benefit and repayment capability is using of foreign capital. The using of foreign capital, different with grant, requires repayment on interest and principle as well as other expenses. International interest payments are all calculated on the basis of compound interest. In addition, normally a loan is charge with the expenses of 0.5% for promising, 0.375% for management, and 0.3% for agent. If borrowing in hard currency, it is necessary to take the extra cost due to the appreciation on currency after several years.

A equation commonly used for one time repayment loan as following:

S=P(1+I)n

Due to the different situation on economic power and others of each country, international investigation on the scale of foreign capital is mainly not at the absolute figure but two relative figures: debt rate and debt repayment rate.

Debt rate =Total debt/GNP

Debt rate is used to observe the relation between the use of foreign capital and economic development. It takes the GNP of a country in assessing the withstanding capacity on the use of foreign capital. What is the best debt rate? Due to the different situation in different countries, it is hard to define a detailed standard. Generally speaking, below 5% means the scale is small, the action on economic development is limited. Beyond 25% is over scaled, might result in debt crisis. Between 5-20% is reasonable normally.

As most of foreign debt should be repaid by foreign exchange, the number of foreign exchange held by a country is the fundamental condition and necessity to control the scale of foreign capital. Foreign exchange held by a country is mainly consist of three parts, international reserve, export gaining in foreign exchange and current fund. In considering that over holding in international reserve and current fund will decrease the using efficient of these funds, it is commonly believed that to expand the scale on foreign capital mainly depended on the variation of export. The index used to investigate the relation between export and foreign capital is called debt repayment rate. This is the second parameter to control the scale of foreign capital. What is the best debt repayment rate? International common accepted standard is 20- 25% , exceeding the warning line might have the risk in running into debt crisis.

Structure in using of foreign capital normally reflects to the manner and sector of foreign capital as well as the structure on source and term.

1. Proper manner is required in using of foreign capital

Based on different combination of manners, the using of foreign capital can be divided into three modes: mode one is to pay equal attention to both direct investment and lending fund. In fact, both absorbing direct investment and the use of lending fund has its advantage and disadvantage. Their differences are showed at:

Firstly, the use of lending fund has huge pressure on debt repayment. In case of misuse, poor benefit or lost control on scale, abrupt decreasing on export, may run into debt crisis. Absorbing direct investment without the problem, as operation activities are responsible by the investor. In opposite, hosting country can enjoy tax income without efforts. But direct investment may control the economy of the host country in a certain degree while there will be no interference from aboard in lending fund provided there is no debt crisis.

Secondly, the use of lending fund has certain limits on the importing of advanced technology and equipment. It is very difficult to obtain real advanced technology and equipment due to the restriction of international technical protection. While as investor is directly related to benefit in direct investment, investor will input advanced technology and equipment in order to seek profit and success. Just for this reason, unbalanced industrial development may be formed as nobody is willing to invest in these projects with less profit and long period.

Finally, the use of lending fund must equipped with corresponding forces in human labor, material and finance. There are certain kind of risks on the fund operation and economic benefit. While government can gain from increased finance income, foreign exchange income and employment by absorbing direct investment without too much concern.

But foreign enterprise may gain more proportion of reinvestment from the profit, the proportion of profit exporting will also increased. These are unfavorable for the host country of foreign capital.

2. Proper direction is required in using of foreign capital

As the scale in using of foreign capital is limited, in order to fully take the two advantages in using of foreign capital to solve capital shortage and to import technology, limited forces should be concentrated in these most important and urgent departments.

Firstly, foreign capital should be used to create the base for economic development, as it will greatly promote the development of other department, and will reach the goal of improving accumulation, quickening economic development.

Secondly, the use of foreign capital should be favorable for the enhancing on the weak sectors of national economy, as the relieving of the most urgent and important “bottle neck” issue can be functioned as an ten times or hundred times multiplier.

Thirdly, the use of foreign capital should be favorable for the establishing and developing of new industrial sectors as it can act as an engine, and brings new power, creates new circumstances, and provides new base for the development of national economy.

Finally, the use of foreign capital should be favorable for the export expanding and the increasing of foreign exchange. By the using of foreign capital, with priority to develop these export industries with small investment, fast turnover and high gaining of foreign exchanges, will not only improve export, enhance employment, increase national income, but also can directly take over the important task of repayment, and to ensure the safety use and payment in using of foreign capital.

3. The source and term of foreign capital should be reasonable

The source and term of foreign capital should be diversified as much as possible to avoid dependence on certain single channel and the term of bond is concentrated in a specified period to increase unnecessary debt pressure. First, the country of capital sources can’t be over concentrated, otherwise will result excessive dependence on certain country or region. Second, control the even spend on foreign capital, balance the repayment with proper combination of long-term, middle-term and short-term debts, so that to avoid the formation of peak repayment and phased debt pressure.

The first establishment on oversea investment carried out by Chinese enterprises is quite late. It is no until the 90’s of the 20^th century, a leap emerged. Presently, oversea investment of China appeared all over the world in 136 countries, the field involved including resource development (such as mining development, forest development and oceanic fishing), processing and erection, production enterprises, transportation and communication, tourism and restaurant.

1. Features on China’s Oversea Investment

1. Chinese multinational enterprises is mainly in three categories

Finance category: represented by Bank of China and China National Trust Investment Corporation(CNTIC). They raise money from international capital market for domestic development and provide loan for oversea enterprises through their oversea subsidiaries.

Trade category: including professional companies in foreign trade represented by Everbright Group, China National Chemistry Import and Export Corporation. They take the lead in going aboard by using of their advantage on the experience of international sales and the wide scope of clients accumulated from their long-term import and export trading. They are the leading force in oversea direct investment in China presently.

Industry category: including these enterprises with advantages on scale, technology, products and talent represented by large state-owned enterprises such as Capital Steel and Second Motor.

2. The scale of Chinese oversea investment is relatively small, mainly in the form of joint venture with local enterprises, and in the field of resource development.

1. Problem existed on China’s Oversea Investment

In view of overall, China’s oversea investment is still at the preliminary stage of development, with problems such as backward operation mechanism, lack of clarified developing policy on oversea investment and perfect industry coordination mechanism. All of these need to be solved in our future practice.