China's FDI falls for a fifth month

PUBLISHED : Wednesday, 18 April, 2012, 12:00am
UPDATED : Wednesday, 18 April, 2012, 12:00am


China posted a fifth straight monthly drop in foreign direct investment (FDI), further denting hopes that the country will remain a bright spot amid the troubled global economy.

The country drew US$11.8 billion of FDI in March, down 5.6 per cent from a year ago, according to the Ministry of Commerce.

The lacklustre figure ratcheted up pressure on Beijing to introduce new economic policies to combat a slowdown.

Shen Danyang, the commerce ministry's spokesman, said yesterday the FDI outlook for this year appeared challenging due to the euro-zone sovereign debt crisis and the fact China was losing its edge in low labour costs.

FDI from European Union investors in the first three months of this year was valued at US$1.4 billion, a year-on-year drop of 31.2 per cent.

Foreign investment has been one of the major driving forces of the China's breakneck economic growth in the past two decades. But as the country draws less FDI, Beijing will need to adjust monetary and fiscal policies to avoid rising unemployment and shrinking domestic consumption.

'The downward trend for FDI is irreversible,' said Zhang Jun, a professor of economics at Fudan University. 'The good old days when the Chinese economy grew on a fast track banking on massive FDI inflows and soaring exports are history.'

For the first quarter, the country attracted US$29.5 billion in FDI, down 2.8 per cent from the same quarter last year.

It is still hoped that the fall in FDI during the past months is temporary and that foreign investors, excited over the potential of the mammoth Chinese market, will continue to set up production facilities in the country.

Overseas investors have flocked to China in the past two decades, taking advantage of its low labour costs to manufacture products bound for other markets.

About half of the FDI in China has been directed at the processing trade - which imports raw materials from abroad before re-exporting the finished products after processing or assembly.

China's outbound shipments have traditionally increased at an annualised pace of more than 30 per cent, but a combination of weaker external demand, the strengthening yuan and higher labour costs have hit the nation's export-oriented businesses badly.

Exports in the first quarter of this year grew only 8.9 per cent from a year earlier.

Economists predict that Beijing will be forced to ease monetary policies by reducing interest rates and adjust fiscal policies, such as by lowering taxes, to bolster domestic companies.

'Compared to other countries and regions, China's economy is still growing fast,' said Shenyin Wanguo Securities chief economist Li Huiyong. 'Efforts by the government and enterprises are needed to improve businesses and a better business climate would eventually draw fresh foreign capital inflows.'

United States businesses, facing rising production and labour costs in China, are feeling less bullish about their prospects in the world's second-largest economy.

In February, a survey by the American Chamber of Commerce in Shanghai showed that US companies were no longer so optimistic about the outlook for their business in China. They had complaints about its regulatory environment, bureaucracy and lack of transparency.

China's economy grew 8.1 per cent in the first quarter, the slowest pace in nearly three years.

It was the fifth quarter in a row in which the pace of economic growth slowed.