China Foreign Investment Falls as Japan Spat Threatens Trade

People's Bank of China Governor Zhou Xiaochuan
Zhou Xiaochuan, governor of the People's Bank of China. Photographer: Andrew Harrer/Bloomberg

Foreign direct investment in China fell in August for the ninth time in 10 months and the government indicated a diplomatic spat with Japan will hurt trade, adding to restraints on economic growth.

Spending declined 1.4 percent from a year earlier to $8.33 billion, the ministry said in Beijing today. Shen Danyang, a ministry spokesman, said at a briefing that the dispute over islands claimed by Japan and China will “definitely” have a negative impact on trade, after protesters attacked Japanese cars and shops across China.

China’s economy may grow the least in 22 years this year as Europe’s debt crisis and slowing U.S. expansion crimp exports, and a property crackdown damps domestic demand. Further weakness may prompt the government to build on interest-rate cuts in June and July and accelerated investment approvals, with Premier Wen Jiabao saying last week that the nation has room for fiscal and monetary measures.

“The smaller inflow of foreign investments will exacerbate the nation’s current economic slowdown,” said Joy Yang, chief Greater China economist at Mirae Asset Securities (HK) Ltd., who formerly worked for the International Monetary Fund. China’s leaders, following a political transition set to begin this year, may take further steps to support growth including measures to boost domestic investment and consumption, Yang said.

Given the size of foreign investment relative to the economy, the effect on China’s slowdown “will be more in a sentimental rather than material sense,” Yang said.

Yuan Shift

The benchmark Shanghai Composite Index of stocks rose 0.2 percent at the 11:30 a.m. local-time break. The yuan strengthened less than 0.1 percent to 6.3151 against the U.S. dollar and is down about 0.4 percent this year after a 4.7 percent gain in 2011.

Inbound investment in the first eight months of the year fell 3.4 percent to $75 billion, including a drop of about 10 percent in the property market, the ministry said. Outbound spending rose 39 percent to $47.7 billion.

China doesn’t want to see the island dispute affect trade, Shen said at the briefing. China was the largest market for Japanese exports in 2011, while Japan was the fourth-largest market for Chinese exports.

Japanese investment in China increased 16.2 percent in the first eight months from a year earlier, data showed today, down from a 50 percent rise in 2011. China’s investment in Japan fell 11.1 percent in the January-August period.

Currency Sales

Net sales of foreign currency by China’s central bank and financial institutions accelerated last month, People’s Bank of China data showed yesterday, suggesting capital outflows picked up as the nation’s economic slowdown deepened.

People’s Bank of China Governor Zhou Xiaochuan said downward pressure on the economy is still “relatively large” and the external environment affecting China’s growth is “grim,” according to a commentary today in Financial News, a newspaper published by the central bank.

Even so, officials in China have refrained from easing monetary policy since cutting interest rates and lowering banks’ reserve requirements three times from November to May. Authorities have signaled they won’t enact stimulus near the scale of a 4 trillion yuan ($586 billion at the time) package announced in 2008, amid a global crisis when 20 million migrant workers lost their jobs.

Zhou said in the commentary that the central bank will keep the continuity of monetary policies and make more effective and targeted adjustments.

Losing Status

“China is gradually losing its favorite destination status for foreign investors because of its rising costs and slowing economy,” said Liu Li-Gang, chief Greater China economist in Hong Kong at Australia & New Zealand Banking Group Ltd., who previously worked at the World Bank.

At the same time, “given China’s huge surplus capital and its position to export capital, we do not think this is a worrying sign,” and companies will take advantage of China’s transition to a more consumption-driven society, Liu said.

Inflation that accelerated for the first time in five months in August may limit any monetary easing. The government is also persisting with a campaign to rein in speculation in the property market and make housing more affordable.

China needs to “moderately lower” interest rates, Li Daokui, a former central bank adviser, told reporters in Tianjin on Sept. 11. Growth will pick up in the fourth quarter and China’s new infrastructure investment plans will aid expansion at the start of next year, he said.

Stores Closing

Home Depot Inc., the largest U.S. home-improvement retailer, said Sept. 13 it is closing its remaining seven so-called big-box stores in China as it shifts its focus to specialty and online outlets, firing about 850 workers.

The slowing economy is helping spark more competition among cities and regions to attract foreign investment. At a fair organized by the Commerce Ministry this month in the coastal city of Xiamen, governments advertised their incentives, including housing subsidies by Xiamen’s Haicang district, special public-security protection from a district in Hubei province and local-tax refunds from an industrial park in Inner Mongolia.

“It’s not easy to attract investors, and every region has its own advantages,” Huang Songren, an official from an economic and technology development zone in Zhangzhou, a city in China’s Fujian province, said Sept. 8 from his booth at the fair.

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