Foreign investment into China rises just 0.29pc in May as growth slows

Warnings sounded as weaker industrial growth and external demand limit capital inflows, leading to fall in banks' foreign exchange buys

PUBLISHED : Tuesday, 18 June, 2013, 12:05pm
UPDATED : Wednesday, 19 June, 2013, 3:50am

Sluggish industrial activity on the mainland and cooling external demand curbed foreign investment inflows last month but property prices continued to rise.

The situation may force policymakers to tread carefully as they try to recalibrate the economy and deliver structural reform. Fewer economists expect Beijing to take aggressive steps to boost domestic growth.

Foreign direct investment into China grew 0.29 per cent in May from a year earlier to US$9.26 billion, following a 0.4 per cent rise in April.

Foreign investment in the services sector climbed 4 per cent in the January-to-May period from a year earlier, offsetting a 1.4 per cent decline in manufacturing industries, the Ministry of Commerce said yesterday.

Foreign investment in the property sector fell nearly 5 per cent in the five-month period compared with a year earlier, the ministry's spokesman, Shen Danyang, said at a press briefing. Property prices continued to rise even after the government tightened controls. New home prices in 65 out of 70 major cities increased in May from April, according to the National Bureau of Statistics.

"China's economy has come to a difficult turning point, where many low-end manufacturing industries are losing competitiveness but new growth drivers have yet to be found," said Chang Jian, an economist at Barclays Capital Asia. "While there may be some room for an interest rate cut, it will be restricted by the rise in property prices."

Import and export data deteriorated after the foreign-exchange regulator reined in speculative inflows betting on yuan appreciation. The crackdown caused market liquidity to shrink.

Central bank data showed banks' foreign-exchange purchases rose only 67 billion yuan (HK$84.8 billion) last month, compared with 294 billion yuan in April.

"The trade situation will be quite grim for the full year. Many, many difficulties need to be overcome before macroeconomic targets can be met," Shen said.

He noted challenges including yuan appreciation, weak external demand and a slowdown in industrial production.

The government is targeting 7.5 per cent economic growth this year, after the economy grew at a 7.8 per cent pace in 2012, the slowest in 13 years. The World Bank last week trimmed its forecast for mainland growth this year to 7.7 per cent from 8.4 per cent. Barclays lowered its gross domestic product growth forecast to 7.4 per cent from 7.9 per cent, saying it believed China's new leaders had a greater tolerance for slower growth.

Nomura International's chief China economist, Zhang Zhiwei, said there was a 30 per cent chance that GDP growth would drop below 7 per cent in the third or fourth quarter, citing tightening liquidity.

"Rising property prices make it difficult for policymakers to loosen monetary policy, at least in the short term," he said.

"We expect the government to continue focusing on financial risks before the [second-quarter] data release on 15 July."