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Sliding Investment in China Signals Confidence Waning

Foreign direct investment in China fell to the lowest level in two years in July, fueling concern that waning confidence in the nation’s growth prospects may restrain any economic rebound.

Investment declined 8.7 percent from a year earlier to $7.58 billion, the eighth drop in nine months and the smallest inflow since July 2010. The Ministry of Commerce released the data at a briefing in Beijing today.

Chinese financial institutions sold a net 3.8 billion yuan ($600 million) of foreign currency last month, indicating capital is flowing out as property curbs and weakness in exports slow growth and the yuan weakens. Premier Wen Jiabao stoked speculation that the government may cut banks’ reserve requirements to support the economy when state media reported yesterday that he saw room to adjust monetary policy.

“Boosting confidence is very important and it needs action,” said Shen Jianguang, Hong Kong-based chief Asia economist for Mizuho Securities. “The government needs to reduce the tax burden for companies and cut the reserve ratio and interest rates to support growth.” He sees at least two more reductions in reserve requirements this year and one in the benchmark lending rate.

China’s slowdown may extend into a seventh quarter after export growth collapsed in July and industrial production and lending missed economists’ forecasts. The nation reported a $71.4 billion capital account deficit in April-through-June, the biggest quarterly shortfall in data going back to 1998.

‘Grim’ Trade Outlook

“In the second half, China’s foreign trade and export situation will be more grim, there will be more difficulties, harder tasks, and the pressure of achieving the full-year target will be bigger,” Shen Danyang, spokesman for the commerce ministry, said at today’s briefing. The country aims for 10 percent growth in trade this year.

The People’s Bank of China is likely to cut reserve requirements within the next two weeks, Nomura Holdings Inc. said in a note today, saying that Wen’s comments reinforced that view. UBS AG said that a reduction may come “soon” and the central bank is likely to work with regulators to encourage more lending to key investment projects.

The nation’s biggest banks are currently required to park 20 percent of their deposits at the PBOC.

China’s swap rate climbed to a three-month high of 2.9 percent today, reflecting a worsening cash crunch. The 14-day repurchase rate, a gauge of interbank funding availability, jumped the most in almost two months, rising to 4.1 percent.

The yuan has declined about 1 percent against the dollar this year. The currency weakened about 0.1 percent to 6.3683 per dollar as of 12:34 p.m. in Shanghai.

Wen’s View

“In the recent months, especially since July, there are some positive changes in the economy,” said Wen, 69, as cited by state television. Domestic demand is showing greater effect in supporting economic growth, industrial output in eastern regions is picking up and the job market is stable, he said.

Four analysts forecasting foreign direct investment all predicted declines, ranging from a 2.2 percent fall to a slide of 9.2 percent.

Caterpillar Inc. (CAT), the world’s largest maker of construction and mining machinery, shut its main excavator factory in China for much of July and had employees on shortened work weeks, Mike DeWalt, director of investor relations at the Peoria, Illinois, company, said in an Aug. 8 conference presentation, according to a transcript.

“The current sales level in China is quite depressed,” DeWalt said. “We’ve cut production there.”

Expansion Plans

At the same time, some overseas companies are continuing to expand in a nation where rates of growth remain higher than in developed markets. Yum! Brands Inc. (YUM), the U.S.-based operator of KFC and Pizza Hut restaurants, has boosted the number of locations where it plans to open this year to at least 700.

The nation is loosening some restrictions on investment from abroad, with the securities regulator allowing foreigners to buy a broader range of bonds. China will encourage foreign investment into industries including high-end manufacturing, technology and new energy, Zhang Ping, chairman of the National Development and Reform Commission, said last month.

China’s economy, a driver of demand for commodities, grew 7.6 percent in the second quarter from a year earlier, the least in three years. The government is persisting with curbs on the housing market to make properties more affordable after prices jumped during the last round of stimulus.

Wen said that easing inflation leaves room to adjust monetary policy, according to yesterday’s state media reports.

‘Central Concern’

“Policy makers have made clear in recent weeks that supporting economic growth is their central concern,” Qinwei Wang, an economist at Capital Economics Ltd. in London, said before today’s release. “We continue to think that more policy support will be announced soon, including a further cut to the required reserve ratio, and that more infrastructure projects proposed by local governments will be given the go-ahead.”

Wang is a former employee of the People’s Bank of China, according to his profile on Capital Economics’ website.

Elsewhere in Asia today, South Korea reported a decline in unemployment. In Europe, euro region data may show that consumer prices fell in July from June, while the U.K. will report on retail sales.

In the U.S., jobless claims may have increased to 365,000 in the week ended Aug. 11 after unexpectedly falling to 361,000 the previous week, according to the median forecast of economists surveyed by Bloomberg News. The world’s biggest economy will also release data on housing starts and building permits.

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at xzhou68@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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