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China Foreign Investment Falls for 11th Time in 12 Months

Foreign direct investment in China fell for the 11th time in 12 months as labor costs rose, an economic slowdown threatened to drag growth to a 13-year low and a territorial dispute with Japan weighed on trade.

Investment dropped 0.2 percent in October from a year earlier to $8.31 billion, the Ministry of Commerce said in Beijing today. FDI inflows in the first 10 months of the year declined 3.5 percent to $91.7 billion, while non-financial outbound investment rose 25.8 percent to $58.2 billion.

The decline in inflows highlights challenges for new Chinese leadership headed by Xi Jinping, who took the reins of the ruling Communist Party last week in a once-a-decade power handover, as officials seek to reverse a growth slowdown. The world’s second-largest economy may expand by 7.7 percent this year, the weakest pace since 1999, based on the median estimate of analysts surveyed by Bloomberg News.

“Inward FDI will decelerate much faster next year,” given the economic slowdown and rising labor costs, said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “Outward FDI will continue the current trend of strong growth” and may surpass inbound investment within one year, Shen said.

The Shanghai Composite Index, China’s benchmark stock gauge, fell 0.3 percent as of the 11:30 a.m. local-time break. The gauge had declined 16.5 percent in the year through yesterday.

Yuan Steps

Separately today, People’s Bank of China Governor Zhou Xiaochuan reiterated that the nation will promote the convertibility of the yuan, increase its exchange-rate flexibility and push forward looser controls on interest rates.

Inbound investment in the first 10 months of 2011 rose 15.9 percent; last month’s drop was the smallest since May.

Other data are pointing to a growth recovery, with exports rising at the fastest pace in five months and industrial output and retail sales exceeding forecasts.

Economists have scrapped projections for any easing of monetary policy in the rest of 2012. Analysts surveyed by Bloomberg News Nov. 14-19 see China holding its reserve- requirement ratio at 20 percent through the end of the year, based on the median estimate. That compares with the median forecast for a 0.5 percentage-point cut in last month’s survey.

Tensions from the Japanese government’s purchase of disputed islands in the East China Sea have led to protests in China and boycotts by tourists.

Airline Capacity

All Nippon Airways Co., Japan’s biggest carrier, said Nov. 16 that it will extend capacity cuts on China routes into next month. Chinese visitors to the country slumped 33 percent in October, according to data from the Japan National Tourism Organization, while Japanese trips to China may drop as much as 70 percent until the end of March, said JTB Corp., Japan’s biggest travel agency.

Toyota Motor Corp. (7203), Honda Motor Co. (7267) and Panasonic Corp. (6752) reported damage to their operations in China in September as thousands marched in demonstrations sparked by the purchase of islands known as Diaoyu in China and Senkaku in Japan.

Japanese investment in China slowed in October, data from the Commerce Ministry show. Investment rose 10.9 percent in the first 10 months to $6.08 billion, compared with a 17 percent increase in the January-September period to $5.62 billion.

The drop in last month’s inbound FDI “relates to a weak global investment flow and possible delays in Japan investment projects,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. “China will continue to be a net recipient of FDI flows, although China’s outbound investments will continue to grow at a higher rate than inbound investments.”

--Zhou Xin. Editors: Scott Lanman, Rina Chandran

To contact the reporter on 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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