Why slump in US FDI doesn't count

PUBLISHED : Tuesday, 27 December, 2011, 12:00am
UPDATED : Tuesday, 27 December, 2011, 12:00am


Slowing economies abroad have dampened foreign direct investment and hurt manufacturing activity in China, increasing pressure on Beijing to further ease its monetary policy.

The United States' direct investments in China fell 23.05 per cent to US$2.73 billion in the first 11 months and investments from the European Union were flat at US$5.98 billion.

SCMP, December 16

Let's put this into perspective. The top line in the first chart shows you a rolling 12-month total of foreign direct investment (FDI) in China. It is running at about US$120 billion a year and the trend has generally been up.

Next line down, we have Hong Kong, pouring about US$71 billion a year of FDI into the mainland. And if you believe this money comes from bona fide, Hong Kong-born permanent residents, you probably believe in the tooth fairy too.

Almost all of it represents private (i.e. unreported, undiscovered, under the table) funds being funnelled from the mainland back to the mainland via Hong Kong. This investment flow has thus evaded mainland taxes but qualified as foreign so that it can be taken out again later. Did someone say we don't launder money in this town?

Finally, that line crawling along the bottom of the chart represents the FDI inflow from the United States. Here is a great truth about US direct investment in China: Not only is it utterly insignificant but it has declined for years, running now at about half of what it was 10 years ago. And for a further perspective on how it is, look at the second chart. The real bedrock of investment in China is the deposit base of China's banking system. On the M2 measure of money supply, this now runs at 82.5 trillion yuan (HK$100.5 trillion) or about US$13 trillion. That's the top line on the chart.

The line at the bottom of the chart represents total annual FDI in China - the line that was at the top of the first chart. I didn't bother plotting US investment on this chart. As one grunt soldier said to another during bombardment: 'I can't crawl any lower. My buttons are in the way.'

My guess is that this FDI from the US represents partial investment in production equipment and plants associated with exports made primarily to America. If you use China for slave labour to make the 'stuff' you sell in big box stores in Dog Dung, North Carolina, then you probably shipped across some of the specialised machinery to make it.

If Christmas sales then slow down, you delay the next phase of expansion at your Chinese plant and your investment numbers will also slow down for a while. But the numbers will eventually pick up again because there is another great truth to be told here: Santa Claus and his merry elves have moved from the North Pole and now reside in Dongguan county. There is nowhere else to go to fill the space under the Christmas tree in Dog Dung.

But, however you cut it, the difference it all makes to capital investment in China still takes you only from zero to nothing. The ups and downs of American FDI in China are not a leading indicator of anything.

This is not to say that there is no reason to worry. There is cause for concern in the soundness of the assets into which that 82.5 trillion yuan of deposits has been pumped. The municipal stimulus loans are duff, high speed railway lending looks more sour every day, property loans are becoming more fragile, securities loans are weakening and I'm running out of breath on this lament before it comes anywhere close to an end.

China's economic problems lie at home, not across the ocean - however convenient it may be for Beijing's bureaucrats to look for bogeymen abroad.