China FDI Shows Full-Year Decline as Economic Expansion Slows

China’s foreign direct investment declined for the first full year since 2009 as economic growth slowed and manufacturers relocated to markets with cheaper labor, contrasting with outbound spending that surged to a record.

Inbound FDI dropped 4.5 percent in December from a year earlier to $11.7 billion, the 13th decline in 14 months, according to Ministry of Commerce data released in Beijing today. For the full year, inflows fell 3.7 percent to $111.7 billion, while China’s non-financial investment abroad increased 28.6 percent to $77.2 billion.

China is gradually losing its advantages as a destination for workshops and plants as land and labor costs rise, while deploying some of its $3.3 trillion in foreign-exchange reserves in growth opportunities abroad. The shift in FDI may benefit countries including Indonesia and Vietnam, according to HSBC Holdings Plc.

“It’s an inevitable trend that labor costs will keep rising in China -- not only in coastal areas but also in inland regions,” Shi Lei, a Beijing-based analyst with broker Founder Securities Co., said before the report. “The country will not be an ideal place for low-end manufacturing.”

FDI inflows compare with a 5.4 percent drop in November to $8.3 billion. Outbound investment in the first 11 months of last year rose 25 percent to $62.5 billion.

The role of FDI is diminishing as leaders of the world’s second-biggest economy boost domestic infrastructure spending and lending increases. The share of foreign funds out of total fixed-asset investment has dropped from a peak of 11.8 percent in 1996 to 1.5 percent in 2011, data published by China’s National Bureau of Statistics showed.

Leaving China

Labor-intensive, international manufacturers are leaving China for other Asian countries, Trinh Nguyen, an economist with HSBC Holdings Plc in Hong Kong, said in a Jan. 9 report. Textile investment inflows into China shrank 18.9 percent in the first three quarters of 2012 while manufacturing FDI inflows into Indonesia rose 66 percent, Nguyen wrote.

Panasonic Corp., the Japanese electronics maker, said Jan. 11 it will end production of plasma televisions in Shanghai and shift flat-panel operations to China’s Shandong province.

China’s outbound FDI may surpass inflows within a year, Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd., said in November. China’s foreign-exchange regulator said Jan. 14 that it has created a new unit to use the nation’s reserves, the world’s largest stockpile, by supporting Chinese companies expanding abroad.

The Chinese government will release data Jan. 18 on fourth-quarter gross domestic product, December industrial production and retail sales and full-year fixed-asset investment. Economic growth probably accelerated to 7.8 percent in the October-December period from a year earlier, up from a three-year low in the previous quarter, according to a Bloomberg News survey.

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