China still No 1 for FDI but 2014 looks cloudy

Updated: 2013-12-06 05:33

By MICHAEL BARRIS in New York (China Daily USA)

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China remained the top destination for foreign direct investment among developing countries this year, but a slowdown in the nation's economy and increasingly cautious global investors could dampen prospects for Chinese FDI growth in 2014, according to a World Bank report.

"Foreign investors are increasingly cautious about investing in developing countries in the face of continued global economic and political turbulence," according to a release from the Multilateral Investment Guarantee Agency (MIGA), the World Bank's emerging-economy FDI promotion arm, which produced the report on world investment and political risk.

MIGA said a survey conducted for the report, released Thursday morning, found that economic instability and political risk rank "neck and neck" as top concerns for investors in the short and medium term. Nevertheless, the agency said, nearly half of respondents expect to increase their investments in developing countries over the next year, with the number increasing to 70 percent in three years.

Breach of contract and regulatory issues remained the most important political-risk concerns for investors in developing economies in 2013, according to the report.

The report said continuing investor caution has been a boon for the political-risk insurance industry, putting policies issued on track to match the 33 percent increase of 2012.

In the past year, East Asia and the Pacific continued to be the largest FDI receiving region in the developing world," attracting an estimated $320 billion in inflows, the report found. That figure represented just a 2 percent FDI increase over 2012, a year when global FDI outflows generally declined. Among countries affected by the drop in global FDI growth that year, China's FDI fell 9 percent from 2011 to $253 billion, although the figure still led all developing countries.

Despite moderating economic growth, the number of companies based in developing economies and looking abroad for investment opportunities last year expanded. With outflows of $68 billion in 2012, Brazil, China and India continued to account for the bulk of FDI from developing economies, according to the report.

China, the report said, has emerged "as one of the largest investors in Latin America in recent years", despite having limited investments in that region just a few years ago. It also said Chinese and Brazilian companies are increasingly present in infrastructure projects across the developing world.

That change reflects a shift since the early 1980s in the roles of the public and private sectors in providing infrastructure amid increasing privatization of telecommunications, roads, airports and other public facilities and the growing popularity of public-private partnerships and public finance initiatives, the report said.

In October, a report by the United States Chamber of Commerce focusing on the potential windfall awaiting Chinese companies that might help the US rebuild its crumbling bridges and roads pointed out that China's dramatic infrastructure expansion over the past three decades has endowed many Chinese firms with "significant economies of scale", and increased their size, capability and engineering experience. Combined with low labor costs, these Chinese infrastructure goods and services companies can "offer construction materials at globally competitive prices", the chamber report said.

Alongside growth in public-private collaborations in infrastructure, investments in natural resources have also kept pace, according to the World Bank survey. In 2012, 9 percent of FDI went to projects related to mining, quarrying, and petroleum. Booming commodity prices have been "a boon" to economies such as Angola, Gabon and Zambia, among others, with investors keen to exploit the potential of developing-market reserves, according to the report. The prominence of the BRIC countries — Brazil, Russia, India and "especially China" — has driven this trend higher, according to the survey.

The world had FDI inflows of $1.41 trillion in 2012. Developed countries had $813.7 billion in FDI inflows that year, while developing countries had $603.6 billion.

Across East Asia and the Pacific, FDI inflows last year fell to $313.7 billion from $339.9 in 2011. China led surveyed countries with $253.5 billion in FDI inflows, down from $280.1 billion in 2011.

Trailing China in FDI inflows last year were Indonesia, with $19.6 billion, Thailand with $10.7 billion, Malaysia with $9.7 billion, Vietnam with $8.4 billion and Philippines with $2.8 billion.

The World Bank projects that FDI flows to developing economies will decline in 2014 and increase by 12 percent in 2015.

"Despite uncertainties in the short term, developing countries continue to offer favorable medium-term growth prospects, a large and growing consumer base, natural resources, and relatively low labor costs, all of which make them potentially attractive destinations to foreign investors," the report said.

"These factors favor a rebound, especially if macroeconomic conditions strengthen and political challenges are addressed."

While most survey respondents (47 percent) planned an increase in FDI, a significant share (37 percent) intended to neither increase nor decrease investments over the next 12 months.

Over the next three years, the overwhelming majority of investors (70 percent) express the intention to increase investments. The share of respondents who do not plan to increase or decrease their investments is more than halved (15 percent).