FDI: The Rise & Fall (& Policy)

Related entries: Economy, Investment, Strategy

Two headlines to consider:

    1. “Foreign direct investment in China rises 23.6% in 2008” (MarketWatch)
    2. “Foreign Direct Investment in China Falls 5.7 Percent” (Bloomberg)

Of course they are talking about different timeframes, but it is clear from the text that the FDI environment is on the turn. MarketWatch notes:

    “China’s foreign direct investment rose by 23.6% in 2008 from a year earlier, according to media reports Thursday. China drew in a record $92.4 billion of investment in 2008, Dow Jones Newswires reported, citing figures released by the Ministry of Commerce at a press conference in Beijing Thursday. The gains follow a 13.6% rise in investment in 2007. Excluding flows into the financial sector, China attracted $40.65 billion in investment, a rise of 63.4%, the report cited ministry spokesman Yao Jian as saying. Investment flows weakened late year, with December recording inflows of $5.98 billion, down 5.7% from a year earlier, while November saw a 36.5% fall on year.”

The set of stats from Bloomberg, looks at the more recent past, and tells a different story:

    “Foreign direct investment in China declined for a third month, adding to the toll that recessions in the U.S. and Europe are taking on the world’s third-biggest economy.

    Investment fell 5.7 percent to $5.98 billion in December from a year earlier, the commerce ministry said at a briefing in Beijing today. November’s decline was 36.5 percent.

    China’s deepening economic slowdown and a global squeeze on company credit and profits may continue to discourage investment. The CSI 300 stock index has tumbled 66 percent in the past year, house prices in the nation’s 70 major cities fell for the first time on record in December, and exports are waning because of recessions in the U.S. and Europe.

    “Multinationals will become even more cautious in expanding,” said Ma Yu, a senior researcher at the Chinese Academy of International Trade and Economic Cooperation in Beijing. “A lot of the foreign investment that rushed to China over the past few years to gain from a stock and property boom is leaving.”

    The yuan fell to 6.8369 against the dollar as of 12:50 p.m. in Shanghai after closing at 6.8352 yesterday.

    A halt in the currency’s gains against the dollar since mid-July is also discouraging investors from putting money into China.”

    …For 2008, [Chinese outbound] investment rose 23.6 percent to a record $92.4 billion, commerce ministry spokesman Yao Jian said. Outbound investment jumped 63.6 percent to $40.7 billion, with mergers and acquisitions accounting for half of that. Those figures exclude financial-sector investment.

    The number of new companies set up by U.S. investors in China fell 32 percent in the first 11 months of last year, according to government data. For European investors, the decline was 23 percent.”

    Clearly the investment environment is tough, and funds are hard to come by. China Law Blog has some pointers on FDI strategy from a presentation by blogger Steve Dickinson:

    “The PRC FDI system dramatically changed during the period of 2006 to 2008. The main features of that change are [headings are below, click the link for full text]:

    A. Tax neutral FDI policy.
    B. FDI through M&A strongly discouraged.
    C. Direct foreign investment in real estate prohibited, with remaining foreign investment in real estate strongly discouraged.
    D. FDI policy changed from export led growth to quality investment supporting domestic led growth….”

CLB concludes that “The current response from the PRC regulators suggests that there will be a qualified return to the export led growth model” and lists key implications. If you are into FDI (or its implications for business and the economy), better read the full article, as well as our earlier post on how China has been Redefining FDI.

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