Weaker FDI to China linked to seasonality

Foreign direct investment (FDI) in China grew at its weakest pace in six months in February, but analysts warn that seasonality may explain the swings even as a weakening economy continues to dent investor confidence.

February FDI rose by just 0.9% from a year earlier, slowing sharply from a 29.4% jump in January, adding to mostly weak February data, which has raised expectations of further policy steps from Beijing to spur growth.

“We expect FDI to maintain slow growth this year, probably similar to last year,” said Zhao Hao, China economist at ANZ in Shanghai.

“China’s manufacturing sector faces overcapacity and foreign investment into some other sectors is subject to high barriers.”

February FDI of $8.6bn was down 38% from $13.9bn in January.

Analysts, however,cautioned against reading too much into the weak February FDI numbers because seasonality could cause swings.

China’s Lunar New Year holiday, which causes strong seasonal distortions, began on January 31 last year but started on February 19 this year.

For January and February combined, inbound FDI rose 17% from a year earlier, to $22.5bn, the country’s commerce ministry said yesterday.

Exceptionally strong rises in FDI inflows in the first two months of the year, including a nearly 874% jump for Saudi Arabia and a 367% gain for France, were due to one-off deals, said commerce ministry spokesman Shen Danyang said.

Investment from the US fell 31.8% from a year earlier, while that from Japan slumped 15.9%.

China’s pledge to shift away from manufacturing and heavy industry and find new growth drivers in services and consumption was evident in the inbound investment flows.

In the first two months of the year, FDI into China’s service sector shot up 30%, while investment into manufacturing grew by only 7.1%.

FDI in China rose just 1.7% in 2014, the slackest pace since 2012. The weak performance underscored a cooling economy which is spurring more Chinese firms to plough money into assets overseas in a trend that is soon set to overtake inbound investment.

Indeed, data from the ministry showed that China’s non-financial outbound direct investment surged 68% in February from a year earlier — the strongest rise in five months.

Outbound investment for January and February combined rose 51% to $17.4bn.

The government has been encouraging Chinese firms to invest abroad to help them become more competitive internationally, utilise their surplus capacity, and help slow down the rapid build-up of foreign exchange reserves.

Last year, China drew a record $119.6bn worth of FDI, while outbound investment rose 14.1% to a new high of $102.9bn.

Reuters