Foreign Direct Investment in China, or FDI, has seen rapid growth for several decades now, a pace that cannot be easily sustained. With developed countries still struggling to rectify their own shaky economic foundations, FDI in China has dropped for a consecutive six months in April 2012, prompting the government to take corrective measures.
FDI suffered a 2.38% drop in the first four months of 2012 to $37.9 Billion from the previous year, whereas outbound direct investment grew an astonishing 72.8% in the same time span to $23.2 Billion. Shen Danyang, spokesman for the Ministry of Commerce in China, blamed a combination of the sluggish global economic conditions and other countries tightening preferential investment policies for this lackluster performance.
The only bright spot is that FDI from the U.S. grew 1.9% to $1.05 Billion, with FDI from Japan rising by a solid 16% to $2.7 Billion, while FDI from the European Union shrank by a whopping 27.9% to $1.9 Billion.
Rising labor costs have also been largely blamed, and factory closures during the Chinese New Year and the Labor Day holiday did not help either.
An early indicator of industrial activity in China, the HSBC Purchasing Managers Index (PMI), dropped to 48.7 in April from May’s 49.3, the seventh straight month that the PMI has stayed below 50, a deepening sign of industrial contraction.
In the years that Foreign Direct Investment in China was still strong, the central bank had raised the Reserve Requirement Ratio (RRR), a policy trend that Donna Kwok, an economist from HSBC Greater China, believes was too effective last year. However, the impact of this policy was quickly reduced when the People’s Bank of China cut its reserve requirements three times in the past six months.
To counter the vexing problem of rising labor costs, China is now emphasizing quality over quantity, and a revised version of the Foreign Investment Industries Guidance Catalogue, simply referred to as “the Catalogue”, was jointly issued on December 24, 2011 by the Ministry of Commerce and China’s National Development and Reform Commission (NDRC) to reflect this new policy trend.
Nevertheless, the second largest economy in the world is far from being subdued. As an integral part of the global economy, the fall in FDI is not expected to have a long lasting impact on the Chinese economy.
The former head of the Ministry of Foreign Trade and Economic Cooperation, Li Zhongzhou, also points to the tight regulation and control of the real estate market as contributing to a less than stellar FDI, as the real estate segment accounted for a full quarter of FDI within the last two years. Tourism, however, is still expected to be strong.
The Grexit scenario is being closely watched by Chinese authorities, with Peng Wenshen, an economist at investment bank China International Investment Corp., predicting massive stimulus measures to be enacted after a Greece exit from the Euro zone, possibly requiring as much as $98 Billion to protect China’s 7.5% growth target.
Foreign direct investment in China may have fallen lately, but Ernst and Young, the big accounting firm, still considers China as the most attractive investment region in the world, eclipsing the U.S. at number three.