China’s FDI Falls Again

Bloomberg reports that foreign direct investment (FDI) in China fell for a fourth straight month in February:

Investment declined 0.9 percent to $7.73 billion last month from a year earlier, the Ministry of Commerce said in a statement today, following a 0.3 percent drop in January. Overseas spending in the first two months decreased 0.6 percent to $17.7 billion.

The outlook for foreign investment in China is “grim,” ministry spokesman Shen Danyang said last month, citing “slack” external demand, rising operating costs and funding difficulties faced by some companies. Spending by overseas businesses, which climbed to a record $116 billion last year, may stabilize at around $100 billion, according to ING Financial Markets.

“Investors are cautious now due to the sluggish global recovery,” Pan Xiangdong, a Beijing-based economist with China Galaxy Securities Co., said before the release. At the same time, “China will continue to attract foreign investment because it has an expanding middle class that offers attractive opportunities.”

One expert told the China daily he was not optimistic about the inflow of foreign investment of China, in light of the current global macroeconomic backdrop:

“This is not good news, it reflects the gloomy global economy,” said Wang Zhile, director of the research center for transnational cooperation at the ministry.

It is difficult to be optimistic about the outlook for FDI “given the doubts in the minds of foreign companies about the global economy and China’s foreign investment environment,” he said.

The fall in FDI and the record trade deficit reported last weekend indicate a pressure on capital inflows that China may need to counter by easing monetary policy, according to Reuters:

But any move by the central bank probably will be tempered by belief the trade position will change. Analysts think trade surpluses will return — an assumption echoed by Commerce Ministry spokesman Shen Danyang.

“Our judgement is that the trade deficit in February is unlikely to persist. Overall, we will still see a trade surplus this year, but it will gradually shrink and account for a smaller percentage of GDP,” Shen told reporters at the monthly media briefing where the February FDI data was released.