Chinese FDI falls for first time in 9 years

PUBLISHED : Saturday, 07 July, 2012, 12:00am
UPDATED : Saturday, 07 July, 2012, 12:00am


Foreign direct investment (FDI) from China fell for the first time in nine years in 2011 as the eroding value of businesses in developed nations put merger and acquisition plans on hold.

According to a report by the United Nations Conference on Trade and Development (UNCTAD), outgoing FDI from the mainland declined 5.4 per cent to US$65.12 billion last year - the first drop since it ramped up expansion overseas in 2003.

Francis Cheung, head of China-Hong Kong strategy at brokerage firm CLSA, said the data was unsurprising. 'Since Greece threatened to break from the euro zone last June, pricing negotiations of any merger and acquisition have become immensely difficult,' Cheung said. 'If I were an executive from a corporation in one of those troubled regions, I would also hold off until better times.'

Cheung expected China's FDI outflow to rebound in the next few months as projects restarted amid better external economic conditions.

The UNCTAD report estimated the top 100 largest global firms held up to US$5 trillion in cash, which they were expected to use on dividend payouts and reducing debts rather than investing. But such cash holdings could fuel a new round of FDI when the situation improved.

China remained the world's most favoured destination for FDI, with inflows rising 8 per cent to US$124 billion last year, and for the first time investment in services surpassing that of manufacturing. UNCTAD said the amount of capital inflow to the financial sector would rise in the coming years as foreign banks including HSBC and Citigroup expanded their presence on the mainland.

The group expected world FDI inflows - which jumped 16.5 per cent year-on-year to US$1.5 trillion last year - would slow to growth of 6.67 per cent to US$1.6 trillion this year while picking up eventually to US$1.8 trillion in 2013 and US$1.9 trillion the year after.

Hong Kong, meanwhile, saw another record year for FDI inflow - which jumped 17 per cent to US$83 billion last year, exceeding the growth rate of both China and the world's average.

Its FDI outflow reached US$81.61 billion last year - a drop of 14.45 per cent from 2010 but a rise of 47.95 from the four-year average before then.

Invest Hong Kong, which helps foreign and mainland investors to set up offices in Hong Kong, said the FDI was largely in banking, transport and logistics and professional services. But economist Terrence Chong Tai-leung of Chinese University said some of these inflows could also be cash that was 'parked' in Hong Kong briefly before being returned to China in the form of FDI.

'Some of the money from mainland corporations stays in Hong Kong briefly before going abroad for investments, while some could be meant to be sent back to these corporations' headquarters in China disguised as business transactions,' Chong said.

'But of course, a large part of it could also be investments from foreign corporations which set up outlets or start infrastructure projects in Hong Kong.'