Future Remains Bleak

Chinese government has recently introduced more flexible policies on foreign investment， which can help to partially restore the development of foreign inflows in China but can hardly resume its previous growth speed. Bian Weihong， a senior analyst from the Institute of International Finance of the Bank of China， believed that， given the current conditions， the situation for foreign investment absorption in the second half of the year will still stay complicated. Bian also pointed out that in the previous phase， as the European debt crisis stops deteriorating and the U.S. sees a relatively fast economic growth and rapid decline in the unemployment rate， foreign investment in China is actually showing signs of stable rebounding. At this stage， however， the overall situation is far from promising. If the European situation keeps going down， China’s foreign investment development will be adversely affected. Therefore， within the coming months， the FDI in China is expected to remain in a slightly downward trend.

At the same time， the continuous negative growth of FDI and occasional negative growth of the monthly funds outstanding for foreign exchange also confirms the judgment of a longterm slowdown in capital inflows on the market. According to the statistics released by the People’s Bank of China (POBC)， after three consecutive months of negative growth in the fourth quarter of 2011， from the February of 2012， new financial institutions has started to see a positive growth in their funds outstanding for foreign exchanges. However， the latest data released on May 15 shows that by the end of April， the balance of foreign exchange funds of financial institutions was 25.589 trillion yuan， 60.571 billion yuan less than in March. This is the first negative growth point in the foreign exchange funds this year.

Bian said， the variation of foreign exchange funds， to some extent， is correlated with the variation of the RMB exchange rate. Despite of the fact that RMB continued to appreciate in April， the expectation of the market for the appreciation of RMB saw a reversal while foreign investment is determined by the expectation for RMB appreciation， besides， as western media continuously magnify the pessimism for the prospects of China’s economic development， the capital inflow into China tends to gradually weaken. “As for the growing surplus in April， we must be clear about whether it is an occasional singlemonth rebound or a trend for a continuous growth in the coming months. In addition， as the expectation for RMB appreciation has been lowered， some enterprises would not exchange RMB as rapidly as before and the foreign exchange inflows would also be reduced.”Bian Weihong said in an interview with the Economic Information Daily.

The slowdown of capital inflow has showed the change of the long-lasting“double surplus” pattern in the balance of payments. Liu Weiming， an international financial market expert from China CITIC Bank said， “as the global financial markets are still volatile and the European debt crisis still unstable， it will become quite complicated for the cross-border capital flow in the future.”

According to the Cross-Border Capital Flow Monitoring Report 2011 released by the State Administration of Foreign Exchange (SAFE)， fundamental factors for the surplus in China’s balance of payments still exist. However， due to the unprecedented complexity and severity of the international economic and financial situations， the cross-border net capital inflow may drop in China and suffer fluctuations. SAFE also points out that the European debt crisis is still evolving and the global finance is in a process of deleveraging， which will significantly increase the risks of large-scale cross-border capital flows.

Analysts believed that the continued decline of FDI has released the pressure of funds outstanding for foreign exchange， leaving room for the central bank to cut the deposit reserve ratio in the future. Li Huiyong said， the European Central Bank (ECB) has required European banks to raise their adequacy ratios of core tier-1 capital to 9% before June 30. To meet this requirement， the EU will become more cautious in overseas investment and it is expected that the FDI before July will continue a negative growth. FDI is a part of foreign exchange funds and its decrease will possibly lead to the decline of these funds. In such cases， the government will need to loosen the domestic monetary policy by cutting the deposit reserve ratio or resorting to a reverse repurchase. Li also predicts that the central bank will cut the deposit reserve ratio twice this year.

Teng Tai believes that FDI decline will become a trend within this year and this will result in a decrease of domestic capital. It is necessary for the government to lower the deposit reserve ratio， so as to further release the liquidity of capital.