Foreign Investment in China Rises 6.1%, Underscoring Confidence in Economy

Foreign direct investment in China increased at a faster pace in September, underscoring confidence in the outlook for the fastest-growing major economy and adding to pressures on the nation’s exchange rate.

Investment rose 6.1 percent from a year earlier to $8.4 billion after a 1.4 percent gain in August, the Ministry of Commerce said in a statement in Beijing today. Investment in the first nine months of 2010 climbed 16.6 percent to $74.3 billion.

Companies from clothing retailer Esprit Holdings Ltd. to carmaker Renault SA are seeking to expand in China amid elevated U.S. unemployment and European budget cuts. The flood of money into China, including from speculative cash, forced the central bank to buy foreign currency and avert faster gains in the yuan, helping spur a record jump in reserves last quarter.

“The favorable near-term economic outlook combined with rising consumer prices increasingly resemble the period of currency appreciation between 2005 and 2008,” when the yuan soared 21 percent versus the dollar, Bill Adams, resident economist for the Conference Board China Center in Beijing, said in a statement today. Adams’s New York-based research group today reported that its gauge of the Chinese economy’s outlook rose for a fourth straight month in August.

Rising Yuan

The People’s Bank of China set today’s reference rate for yuan trading at 6.6497 per dollar, the highest since a dollar peg was ended in July 2005, and the currency was headed for a sixth weekly advance.

“The FDI inflow will certainly increase pressure on yuan appreciation in the short term,” Sun Chi, a Hong Kong-based economist at Nomura International Hong Kong Ltd.

Asia’s role as leader of the world recovery has lured $2 billion of capital inflows daily since 2009, spurring record gains in foreign-exchange reserves, a report this month by DBS Group Holdings Ltd. showed.

China’s economy will grow 9.6 percent next year, four times the U.S. pace and six times the euro area, the International Monetary Fund estimates.

“The biggest attraction for investment: the growth,” Yao Wei, a Hong Kong-based economist at Societe Generale SA, said before today’s report. “Investment will grow at a robust pace.”

Liquidity Measures

That’s complicating monetary policy in China, which this week reported that its currency holdings, the world’s biggest, swelled to $2.65 trillion. The central bank told six banks to temporarily set aside more cash as reserves, people with knowledge of the matter said this week, draining money out of the financial system to limit asset bubbles and inflation.

China is ranked the top destination for FDI for 2010-2012, the United Nations said last month, while the Chinese commerce ministry estimates inbound investment may exceed $100 billion this year.

Esprit, the biggest Hong Kong-listed clothing retailer, said last month that it plans to expand its operations to 400 Chinese cities, with store numbers rising 83 percent to 1,700 within five years because China “represents the biggest growth opportunity.”

Renault, France’s second-largest carmaker, plans to expand in the nation through a partnership with Dongfeng Motor Group Co., Chief Executive Officer Carlos Ghosn said Sept. 20 in Zhengzhou, central China.

Leading Index

The Conference Board’s leading index rose 0.7 percent to 149.9, according to a preliminary report from the Conference Board posted on its website today. The reading compared with a 0.8 percent gain in July.

Today’s report also showed that the coincident economic index, a measure of current activity, increased 1.0 percent in August after gaining 0.5 percent in July.

August’s increase in the leading index “suggests continuing growth and receding risks of a slowdown in coming months,” says Ataman Ozyildirim, an economist at the Conference Board, said in the statement. “Still, half of our indicators are showing a decline rather than a rise in August from July.”

China’s growth slowed to 10.3 percent in the second quarter from a year earlier, down from the 11.9 percent pace in the first three months of this year after Premier Wen Jiabao took measures to curb credit growth and cool property market. Third-quarter figures will be released next week.

A separate report today showed that property prices rose and transactions jumped in September from the previous month, underscoring the need for further government curbs to discourage speculation.

Prices in 70 cities climbed 0.5 percent from August and the value of property sales soared 56 percent, according to data from the statistics bureau today. Prices rebounded for the first time since May on a monthly basis after staying unchanged in the previous two months and declining in June.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net Yanping Li in Beijing at yli16@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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