China's Foreign Direct Investment Rises 23.4%, Adding to Overheating Risks
Foreign direct investment in China climbed in January, adding to record inflows last year that are complicating Premier Wen Jiabao’s efforts to tame inflation in the world’s fastest-growing major economy.
Investment rose 23.4 percent to $10 billion last month from a year earlier, the Ministry of Commerce said in Beijing today. Estimates of four economists surveyed by Bloomberg News ranged from an increase of 10 percent to 23 percent.
China may need to add to last week’s third interest-rate increase since mid-October and allow faster appreciation of the yuan to control the cash that’s flooding the economy from the trade surplus, foreign investment and surging bank lending. Inflation accelerated to 4.9 percent in January and the nation’s top economic planning agency said last month price gains will remain at a “high” level in the first quarter.
“Foreign inflows are complicating the government’s efforts to reduce excess liquidity and contain inflation,” Scott Chen, an economist at Bank SinoPac in Taipei, said before the release. “These long-term capital inflows will also add pressure for the yuan to appreciate.”
Rising incomes and demand for luxury goods will continue to attract foreign direct investments in China this year, after inflows rose to a record $105.7 billion in 2010, Chen said.
LVMH Moet Hennessy Louis Vuitton SA, the world’s largest maker of luxury goods, expects sales at its watch and jewelry unit to rise the fastest in China this year, as company spends more on marketing and distribution to catch up on its rivals, Philippe Pascal, LVMH’s director of watches and jewelry, said in an interview this month.
New stores planned for 2011 include a Zenith shop in Hong Kong and De Beers stores in Beijing and Hong Kong, LVMH said.
Prada SpA, the Italian fashion house known for its triangular logo, in January said it will start the process for selling shares in an initial public offering in Hong Kong, as rising incomes in China spur demand for luxury products.
The number of individuals with personal wealth of 10 million yuan rose 6.1 percent last year to 875,000, according to the annual Hurun Wealth Report released in April. China’s households hide as much as 9.3 trillion yuan ($1.4 trillion) of income that’s not reported in official figures, according to a study conducted for Credit Suisse AG and published by the China Reform Foundation in August.
Growth in foreign investment in service industries in January outpaced the overall increase, climbing 31.8 percent from a year earlier to $4.69 billion, according to today’s statement. Inflows into manufacturing gained 18.9 percent to $4.7 billion, the ministry said.
“The scale of foreign investment into the services sector will further expand as the structure of China’s economy transforms, especially in large cities,” Yao Jian, spokesman for the ministry, said at a briefing in Beijing today.
The number of new foreign-invested companies approved rose 20 percent from a year earlier to 2,243, and investment into western China surged 81 percent to $510 million, the data show. The proportion of foreign-invested companies targeting the domestic market now accounts for more than 60 percent of the total, Yao said.
Non-financial outbound investment in January rose 15.9 percent to $2.74 billion, the commerce ministry said. China’s investment in Africa last year was $10 billion.
Government scrutiny of acquisitions by foreign companies may slow inflows this year as China sets up a ministerial panel to approve overseas takeovers of local companies under new procedures covering national security issues.
The committee will study deals involved in defense, agriculture, energy, resources, infrastructure, transport, equipment-manufacturing and technology, the State Council said in a statement on Feb. 13.
“We recognize that reviewing mergers and acquisitions is a prerogative of the Chinese government,” said Jacques de Boisseson, president of the Beijing-based European Union Chamber of Commerce in China. “However, we hope that implementation of the new approval process does not adversely affect the predictability of foreign investments in China.”
Commerce ministry spokesman Yao said today that such a review committee is “absolutely necessary” as the number of mergers and acquisitions in China involving foreign companies is expected to grow.
China hopes that the U.S. will increase the transparency of its own national security reviews of foreign acquisitions and grant “fair treatment” to Chinese companies, Yao said.
--Chinmei Sung, Zheng Lifei. With assistance from Jay Wang. Editors: Nerys Avery, Ken McCallum
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