China’s foreign direct investment shrank for the third consecutive month in January as firms in crisis-embroiled Europe slashed spending by over 40 per cent, casting another pall over the outlook of the world’s economic growth engine.
The gloomy trend was augmented by China’s trade ministry, which warned of grim times ahead and promised action to help struggling local exporters cope with lacklustre demand abroad.
But Shen Danyang, the spokesperson for the trade ministry, cautioned investors against excessive pessimism, saying it was too early to predict that China’s import and export growth would shrink this year despite their shock contraction in January.
“Due to growing downward pressures in the world economy, the external environment for China’s imports and exports is getting tougher and overall, the situation remains grim,” said Mr. Shen from the Commerce Ministry.
He said measures to aid exporters include relieving cash strains suffered by small firms, helping companies resolve trade disputes and improving credit insurance for exporters.
Mr. Shen’s comments came just after data from the Commerce Ministry showed China drew $9.997-billion (U.S.) in foreign direct investment in January, down 0.3 percent from a year ago.
Underscoring the turbulence European companies faced as the 27-member European Union battles a stubborn debt crisis, inflows from the region plunged 42.5 per cent to $452-million.
Investment from the United States rose 29 per cent to $342-million while that from 10 Asian countries including Japan edged up a mere 0.8 per cent to $8.586-billion.
In contrast, China’s non-financial outbound direct investment in January leapt 60 per cent from a year earlier to $4.376-billion.
“Previously, they had deep pockets but now, the funding is tight because of debt problems,” Ting Lu, an economist at Bank of America-Merrill Lynch in Hong Kong, said in reference to cutbacks by European firms in China.
But he said the retreat should be temporary and that investors will return in droves to chase China’s heady growth rates, among the highest in the world, when the global economy steadies in the second half of this year.
“For many years, China will be the world’s largest receiver of foreign direct investment,” Mr. Lu said.
Investment inflows into China surged in the years after it joined the World Trade Organization in 2001, and have rebounded strongly after being hit hard by the 2008/09 global financial crisis.
Indeed, China weathered Europe’s festering debt crisis last year to draw a record $116-billion worth of foreign direct investment, giving the Commerce Ministry confidence to target an average of $120-billion in inflows in each of the next four years.
In contrast, China’s trade performance has been far more volatile.
Data last week showed imports sank 15.3 per cent in January from a year ago -- the lowest since August 2009 -- while exports fell 0.5 per cent over the same period, the worst showing since November 2009.
The Commerce Ministry said the real trend is not as dismal as the numbers suggest as the data was distorted by the Lunar Chinese New Year, which fell in January this year but was in February last year.
Mr. Lu from Bank of America-Merrill Lynch agreed that work stoppages during the festive period had exaggerated the poor performance, but nonetheless expects China’s trade growth for 2012 to halve to 10 per cent, from last year’s 20 per cent.
To that end, he said Beijing could ease risks faced by exporters selling in fiscally troubled European nations such as Greece and Portugal by insuring their credit.
“Some banks in peripheral Europe are not so dependable. The Chinese government has deep pockets and if it can give insurance, that would be helpful.”