Introduction:

Since the financial crisis began, the global recession has affected countries by varying degrees. In many countries the possibilities for fiscal policy to drive economic growth were limited – because many countries already had high budget deficits. In conventional wisdom, the promotion of Foreign Direct Investment (FDI) could fill the financing and demand gap. Another benefit of FDI is that it could help to bridge the 'technology gap', by upgrading the industrial structure. In reality, promotion of FDI in China may face some problems, such as low skills, resource degradation, environmental pollution and so on. It leads to crowding out of local enterprises and enlarges regional disparities.

Based on the Sovereign Currency Theory, this chapter first describes the operational mechanism of international funds in China, and then discusses the essence and economic consequences for central and local governments which try to stimulate FDI. The basic structure is as follows: first, to comb through related literature, then analyse the possible problems and risks associated with attempts by central and local governments to attract FDI. This chapter argues that the Western part of China should decline the risks associated with a blind promotion of FDI, and suggests that the central government should instead increase its financial support in the weak Western part, and thereby realise sustainable economic development.