More Going Out than Coming in

China’s FDI suffered a down-

turn again this March， with actual use of foreign capital of US$11.757 billion， 6.1% decrease year on year. It was the fifth continuous month that China suffered a fall in absorbing foreign investment. In the first quarter of 2012， China’s FDI dropped by 2.8% to US$29.48 billion， according to the Ministry of Commerce at its regular press conference on April 17.

However， we found another interesting comparison figure， in the same first quarter of this year China’s overseas investment witnessed an impressive growth of 94.5% and reached US$16.55 billion.

Why did FDI continue to decline while China’s overseas investment hiked so rapidly? What is the reason behind it? Will this trend last long? With these questions， China’s Foreign Trade interviewed Shen Danyang， the spokesman of MoC.

Q: Whydid FDIfall?

downAtu: r F n i rt sht a ly t， d it i r w ec a t sl y th aef fwecot rel dd e th co en solomwicing down global investment in China. For example， the investment from EU to China dropped dramatically by 31.3%. It is very much related to the current European debt crisis. Even the better operating economic bodies in EU， such as Britain and Germany， shrank their investment here; Britain and Germany fell by 52.9% and 17.7% in FDI to China respectively.

Secondly， it was influenced by the domestic control and regulation on the real estate market. In the last couple of years， the real estate industry had attracted about one fourth of the total foreign investment in China. Recently， the central government made harsh actions to control the rocketing real estate price， and that led to the slow down of China’s foreign investment. In the first quarter of 2011， the growth of foreign investment in real estate gained an increase of 38.6%， while in the first quarter of 2011， this figure dropped by 6.3%. This year’s drop in comparison to last year’s spike will obviously have a large impact on the scale of utilizing foreign capital， especially when compared year on year. Of course， we think this drop goes in accordance with China’s macro-control target.

Thirdly， as just highlighted， the data of the first quarter of last year was somewhat high. Last year， China’s FDI was high at the beginning and fell down at the year end. This year the trend will possibly be the opposite.

Q: Any highlights there in the overall decline?

A: Even in the decline， we still have some highlights to bring us cheer. For example， the optimization of industrial structure of foreign capital usage continued， especially the advanced manufacturing industry - which the government encouraged to develop - enjoyed good growth. I can name a few here， 47.4% increase in general equipment industry， 21.1% growth in chemical raw materials and products manufacturing industry， 10.1% hike in the field of special equipment.

Also， as the investment environment is improving， the central part of China is attracting more of foreign capital. In the first quarter of this year， only this area had an increase compared with that in coastal areas and western China. The FDI into the six provinces (including Henan， Shanxi， Hubei， Anhui， Hunan， and Jiangxi) in the middle part of China had increased by 20.7% over the first three month this year.

Another positive highlight was the investment from Japan and US to China maintained growth in quarter one， growing by 13.2% and 10.1% separately.

Q: How do you comment on the FDI’s trend this year?

A: Still not so optimistic. European’s debt crisis hasn’t been solved properly so the capability of investment from European enterprises will see a fall down. The US government now is advocating developing its own manufacturing and encouraging investment on its own land. On the other hand， emerging countries such as India， Brazil and Russia are making efforts to share more of the global investment. Also， the financially trapped Europe now has many very good opportunities to invest that attract global capital to flow into.

In the domestic market， the labour cost is climbing up， the earth’s resource are tightening up， and enterprises are facing difficulties to get financial support… all these factors affect foreign investment to China market.

Q: Why did China’s overseas investment grow rapidly in Q1?

A: The direct reason was some longrun big projects finally closed the deal in this period. For example， Jinchuan Group’s acquisition of US$1.3 billion Metorex mining company in South Africa， and Sany Heavy Industry’s acquisition of a global leading concrete machinery enterprise Putzmeister from Germany.

Q: Will the rise in outwards investment continue?

A: We predict a continuous rapid growth in China’s overseas investment; however， it won’t be always as fast as it was in the first quarter.

Many developed countries like US， EU and Japan are prudent in investing abroad as they are facing a tough situation at home. Meanwhile， more and more countries， developed and developing countries， are hoping China will step forward and invest in them. Still， Chinese companies have to cope with lots of trade friction and trade protection when doing trade with foreign countries. To avoid that trouble and risk some companies prefer to invest directly into the country.

Also， feeling the pressure of increasing cost in raw materials and labour force from home， Chinese companies are willing to go out too， to struggle for a larger profit margin. Chinese government encourages enterprises to go abroad; in China’s Twelfth Five-Year Plan， Chinese companies’ OFDI (Outwards FDI) weighs the same as the bringing foreign companies and capital in. China’s overseas investment will keep growing.

However， we will see a more cautious behaviour from Chinese SOEs， who have played an important role in overseas investment. Last July， the State Council issued strict administrative regulations on SOE’s overseas investment - which will have direct impact on the overall overseas investment this year.