Foreign Direct Investment in China Tumbles on Crisis

Feb. 16 -- Foreign direct investment in China declined for a fourth month in January as companies cut back on spending to weather the global financial crisis.

Investment fell 32.6 percent to $7.54 billion from a year earlier, the commerce ministry said at a briefing in Beijing today. That compared with a 5.7 percent decline in December.

Motorola Inc., the second-biggest U.S. seller of mobile phones, said last week that it had eliminated jobs in China as part of cutting 4,000 workers worldwide. Weaker investment this year by both foreign and Chinese companies may add to falling exports and a sagging property market in hampering government efforts to reverse the nation’s economic slowdown.

“Foreign multinational companies still find China very attractive, but their hands are tied -- they don’t have spare money to invest,” said Sherman Chan, a Sydney-based economist with Moody’s Economy.com. “Once the global economy shows signs of recovery, China will probably see a surge in foreign direct investment again.”

The global crisis, a Chinese Lunar New Year holiday in January, and a high comparative figure a year earlier contributed to the decline, commerce ministry spokesman Yao Jian said.

Thousands of factories have closed in China on a waning world appetite for toys and electronics. The nation’s exports declined by the most in almost 13 years in January and house prices across 70 major cities fell by the most since data began in 2005.

Global Decline

Worldwide, foreign direct investment fell 21 percent last year to $1.4 trillion because of tight credit, the global recession and falling profits, the United Nations Conference on Trade and Development estimated on Jan. 19. It’s likely to decline further this year, the organization said.

In developing economies, investment rose 3.6 percent last year, UNCTAD estimated. While China reported a 23.6 percent increase in investment from abroad in 2008 to a record $92.4 billion, the inflows of cash got smaller each quarter.

A dip in investment from overseas isn’t as big a concern for the Chinese economy as the risk of a slump in spending by local companies, according to Mark Williams, a London-based economist at Capital Economics Ltd.

“In scale, foreign investment pales against investment generated domestically,” Williams said. “Most domestic investment is financed internally by firms from retained profits and with profits now contracting this source of funding is now under threat.”

Economic Slowdown

The world’s third-biggest economy may expand 6.3 percent this quarter, the weakest pace since 1999, according to the median estimate of 14 economists surveyed by Bloomberg News. The government is rolling out a 4 trillion yuan ($585 billion) package of stimulus spending to spur growth.

China’s attractions include low labor costs, an economy that’s still growing when developed nations are in what the International Monetary Fund describes as “a depression,” and a market of 1.3 billion people.

Companies switching manufacturing to China include Groupe SEB SA. The world’s largest maker of countertop kitchen appliances said Feb. 11 that it will eliminate 214 jobs at factories in France and Germany as it shifts production of irons.

In China, Intel Corp., the world’s biggest chipmaker, said Feb. 5 that it plans to close its assembly and test operations in Shanghai, laying off about 2,000 workers, and move the operations to the western city of Chengdu, where costs are cheaper. It also said it will add $110 million of registered capital to its China unit.

Motorola declined last week to say how many jobs it had eliminated in China, where it employs about 10,000 people.

Globally, foreign direct investment will rebound “sooner or later” for reasons including the opportunities created by cheap asset prices and industry restructuring, according to UNCTAD.


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