China's economic growth could be slowing further as data on Thursday showed the first year-on-year drop in foreign direct investment in 28 months and a fresh fall in new orders signalled a further contraction in factory activity. The data highlights increasing risks to China's growth emanating from a deterioration in developed market economies while domestic demand is being dented by government efforts to rein in rampant real estate inflation.
"Growth momentum remains weak with additional downside risks from exports and the property market not yet fully filtering through," said Qu Hongbin, chief China economist at HSBC.
--- Second monthly fall in factory activity signalled by PMI
Qu's comments accompanied the release of the HSBC flash manufacturing purchasing managers' index (PMI), which showed China's factory activity shrank again in December after new orders fell. The PMI, the earliest indicator of China's industrial activity, is likely to entrench views that manufacturers are struggling with waning global demand and tight domestic credit conditions. The contraction indicated by the PMI came swiftly after Commerce Ministry data revealed the first year-on-year fall in foreign direct investment growth in China in 28 months.
November's $8.8 billion of commitments were down 9.8 percent on November 2010, the first fall since July 2009's 35.7 percent year-on-year collapse to $5.4 billion. A sharp drop in inflows from the United States was a particular drag, slowing year-to-date growth in FDI flows to 13.2 percent from 15.9 percent in October's data.
Still, total FDI in the year to date of $103.8 billion suggest 2011 is poised to be a record-breaking year. The slowdown in FDI growth comes after the first outflow in net capital from China in four years in October, part of a recent trend of capital flight from emerging markets largely driven by Europe's festering debt crisis. But Hua Zhongwei, an economist with Huachuang Securities in Beijing, says the long-term allure to global investors of the world's second-biggest economy remained strong and he expected a reasonably swift rebound.
Data from the Commerce Ministry showed that US investments in China dropped 23.1 percent from a year earlier to $2.74 billion in the first 11 months of the year. Investments from the European Union - China's single largest trading partner - were $5.98 billion in the January-November period, up a tiny 0.29 percent from a year earlier.
Investments from 10 of China's Asian neighbours, including Hong Kong, Taiwan and Japan and South Korea, however, jumped 17.98 percent to $89.6 billion in the same period. Service-sector FDI was up 18.6 percent between January and November, more than twice the 7.6 percent rate of growth in the manufacturing sector in the same period. Separately, China has approved 74 yuan foreign direct investment (FDI) projects since the yuan FDI rules were launched in October, with total investments of 16.53 billion yuan ($2.6 billion), Huang Feng, a foreign investment official with the Ministry of Commerce, was quoted by the local media as saying.
Investment inflows, which surged in the years after China joined the World Trade Organisation in 2001, have recovered strongly after being hit hard by the global economic slowdown. But the darkening backdrop is clearly concerning Chinese officials, with economic growth having slowed for three straight quarters and many forecasters expecting it to dip in 2012 below 9 percent for the first time since 2001.
"The overall trade environment next year for China will be complicated, partly due to the economic uncertainties in the European countries, and I should say that the export situation in the first quarter of next year will be very severe," Commerce Ministry spokesman Shen Danyang told a news conference at the release of the FDI data. Growth in Chinese exports and imports slowed in November, fresh evidence of faltering demand abroad and at home that is pushing Beijing towards a more explicit pro-growth policy stance, data showed on December 10.
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