China's FDI is set for a comeback, after months in the dolddrums

Updated: 2013-01-04 16:32

By Zhou Feng (chinadaily.com.cn)

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International investors, after wrestling with economic woes at home, have regained their appetite

In the middle of every month the spokesman for the Ministry of Commerce, Shen Danyang, addresses a news briefing at which he announces the foreign direct investment figures.

After the announcement, one of his signature remarks is along these lines: the drop in China's FDI is temporary and will eventually rebound.

He has said that since November 2011, when FDI fell, on a yearly basis, for the first time since the end of the 2008-09 financial crisis.

In fact, China's FDI continued its losing streak in the 12 months to the end of November in 2012, except for negligible growth of 0.05 percent in May.

So it seems that Shen has had to eat his words for more than a year. But hopefully not for much longer, because China's lure as a world top investment destination is showing signs of recovery.

First, the recovery of economic growth in the world's second-largest economy will renew global investors' confidence in the market.

Economic indicators published over the past two months have confirmed that recovery is on the horizon. Clearly, the Chinese economy is emerging from its three-year trough and is beginning to gain solid footing once again.

The recovery is sustainable because it was achieved without the government introducing huge stimulus on big projects or support for the export sector.

As economic growth recovers, new opportunities will present themselves, and international capital will no doubt flow back to China. 

Second, some overseas investors who parked their money at home as they wrestled with domestic economic problems have gradually regained an interest in international investment as their businesses have ridden out the storms that have buffeted them.

Among them are investors in the United States. The worst for the US economy is essentially over, especially now that the so-called fiscal cliff has been averted. In addition, US investors, with the country's ultra-low interest rate and loose monetary policy, have not exactly been short of capital. But they have been hamstrung by a loss of confidence, having nowhere to invest their money as the economy has ailed.

Now, as the US economy gains momentum, these investors will have regained their confidence in investing, whether it be at home or abroad. The fact that US investment in China has grown over the past few months is the best evidence of that trend.

Third, the foreign exchange advantages that China has offered are becoming clear as its currency renews its trend of appreciation. That trend stalled as the Chinese economy struggled in the second and third quarters.

But the currency has begun to appreciate again in the past few months, widening the foreign exchange profit margin. Coupled with the fact that China's interest rate is far higher than those in many other countries, the lure of investing in China again becomes all the more apparent, especially for short-term speculative investors.

Finally, a group of big Hong Kong investors has large plans to invest in the Chinese mainland over the coming months.

Hong Kong is the Chinese mainland's largest FDI source, accounting for 60 percent of it. This is because many international investors invest in the mainland through their Hong Kong subsidiaries. The Hong Kong branches of mainland-based companies account for a great many of them.

This group of companies, many of them subsidiaries of state-owned mainland conglomerates, will invest in the mainland more aggressively in the coming year now thatChinahas completed its leadership transition.

These companies tend to be conservative with expansion plans before any major leadership transition. This is understandable as a transition will usher in changes in policies and leadership style, even if those changes are minor. State companies, used to following policies drawn up by the top leadership, do not invest heavily when policy changes are taking place.

But they will surely be keen to renew their expansion plans now that the transition is done and after new policy orientation is hammered out. That will result in a spree of investment from Hong Kong to the mainland.

In all, 2013 will be a good year for China's FDI, but of course it will not all be plain sailing.

China's slow progress in market opening, partly in response to rising global protectionism against it, will dampen the confidence of a few international investors.

In addition, efforts by developed economies to lure back investment will result in the loss of FDI into China.

But as the positives outweigh the negatives, Shen of the Ministry of Commerce should be able to tell the monthly news briefing in the coming fortnight: "You see, China's FDI is on its way back. I told you so."

The author is a financial analyst in Shanghai. He can be reached at michaelzhoufeng@gmail.com 

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