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Workers at an electronics factory in the eastern province of Anhui. Saudi Arabia and France invested heavily in China in the first two months of this year. But others are have been deterred by rising costs such as wages, and are setting up in emerging economies like Vietnam. Photo: AFP

China plays down foreign capital flight fears amid manufacturing slowdown

Foreign direct investment climbed 2.2 per cent in March, Commerce Ministry says, but admits that manufacturing has fallen out of favour

China’s Ministry of Commerce has played down concerns about the flight of foreign capital, citing a rise in direct investment from abroad, although it said the mainland’s manufacturing sector has continued to lose appeal.

The judgment came after a third consecutive quarterly decline in China’s foreign-exchange reserves fuelled speculation that foreign capital was fleeing the country amid an economic downturn.

Foreign direct investment (FDI) climbed 2.2 per cent in March from a year earlier to US$12.4 billion, the ministry said on Thursday. First-quarter FDI gained 11.3 per cent.

The number of foreign companies that ended business in China declined 17.6 per cent in the first quarter, while those that withdrew some of their capital fell 35.7 per cent, ministry spokesman Shen Danyang said at a briefing, without telling the value of investment affected.

“Some foreign companies come and some leave. But generally those come out-numbered those leave,” Shen said. “There’s not so-called ‘foreign capital withdrawal waves”.

Monthly FDI figures tend to be volatile when affected by big one-off deals.

However, some economists suspected capital outflows were continuing, citing the US$113 billion drop in foreign-exchange reserves in the first quarter, the largest quarterly fall on record, even taking account of currency value fluctuations. They said the capital flows have been affected by factors including China’s cooling economic growth, property market downturn and a stronger US dollar.

“Confidence sensitive capital outflow” might have occurred in March, ING Asia economist Prakash Sakpal said. He also cited a net sale of foreign exchange by Chinese banks.

Mizuho Securities Asia said the recent rally in the A-share market may have “received the blessing of policy makers” as they aimed to curb any capital flight.

At the briefing, Shen said China’s business environment remains competitive. But he acknowledged that some foreign manufacturers have been hurt by rising labor costs and softening demand in China, where growth eased to a six-year low of 7 per cent in the first quarter.

Rising workers wages have reduced interest for foreign manufacturers to operate in China, once regarded as the "world’s factory".

Microsoft was among the foreign companies that shifted some business to other emerging markets, such as Vietnam. It shut two mobile phone plants this year in China.

The government has encouraged foreign spending in the services sector in a bid to upgrade economic structure.

FDI flowing into services sector rose to more than half of the total FDI last year from 24 per cent in 2001.

China’s non-financial outward direct investment grew 29.6 per cent in the first quarter at US$25.8 billion, driven by investment into regions such as the European Union and Hong Kong, though investment fell sharply in Australia and Japan.

 

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