Falling FDI piles on pressure for monetary easing
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The recent decline in China's foreign direct investment intensified last month, adding pressure for a heavier dose of monetary easing.
FDI fell for the fourth straight month, easing 0.9 per cent to US$7.72 billion last month following a 0.3 per cent drop in January, a 12.7 per cent fall in December and a 9.8 per cent drop in November, the Ministry of Commerce said yesterday. In the first two months of this year, FDI fell by 11.59 per cent.
The weaker data underlined the ripple effect of the euro-zone sovereign debt crisis.
Economists said weakening inward investment was further evidence of an economic slowdown, in addition to a record monthly trade deficit and a fall in new lending.
Several economists at institutions such as BBVA, China International Capital Corp (CICC) and Nomura have said interest rates may need to be cut to spur domestic demand along with three to four rounds of reductions in the reserve requirement ratio - the amount that banks are required to set aside when lending.
Other economists have predicted that the ratio will be lowered as early as the next couple of weeks. A month ago, the ratio was cut for the first time this year, falling by 50 basis points.
'The weak economic data increases the room for policy easing and the likelihood of policy relaxation in the short term,' CICC chief economist Peng Wensheng said. 'The central bank may cut the benchmark interest rate directly to stimulate demand if it finds weakening credit demand to become an obstacle to economic recovery.'
Premier Wen Jiabao cut the mainland's economic growth target to an eight-year low of 7.5 per cent, reflecting the impact of global economic uncertainty.
Ministry of Commerce spokesman Shen Danyang said investment from the European Union slumped 33.32 per cent to US$906 million last month, while investment from the United States barely grew, edging up 0.87 per cent to US$525 million.
Geographically, he said FDI grew faster in central parts of China, rising 19.21 per cent, but fell 1.63 per cent in developed eastern regions.
Shen said foreign investors were concerned about rising mainland wages, with the minimum wage last year jumping 22 per cent on average in 25 regions. But higher wages would help accelerate an industrial upgrade, particularly for labour-intensive industries, he said.
The mainland's trade deficit in February, in US dollars. It is the mainland's largest deficit in at least a decade