July 17, 2012 / 3:44 AM / 5 years ago

China H1 FDI drops, dragged by property investment

4 Min Read

Construction workers are seen on a high rise office building site on the Pudong River bank at the new financial district of Pudong in Shanghai April 14, 2009.Nir Elias

BEIJING (Reuters) - China's foreign direct investment inflows fell 3 percent in the first half of 2012 versus last year, largely as a result of Beijing's moves to deter speculators from entering an overheated property sector.

The dwindling inflows were a further sign of intensifying headwinds facing the world's second-largest economy as global growth slows, and the figures released by the Commerce Ministry on Tuesday followed other data showing China losing momentum.

Regardless of the dent to inward investment, Beijing voiced satisfaction that at least steps to cool off the property sector were having some effect.

"A drop of 3 percent in FDI in the first six months is mainly due to falling investment in the property sector which is the result of macro policies," Shen Danyang, the Commerce Ministry's spokesman, told a news conference.

"We cannot say it is a bad thing."

China drew $59.1 billion in foreign direct investment (FDI) between January and June, with June's inflow alone down 6.9 percent on year ago levels at $12.0 billion. That confirmed figures given by a vice commerce minister on Monday.

Beijing is using strict curbs to cut speculative activity in real estate that has driven property prices to unaffordable levels in many places across the country and Premier Wen Jiabao has made repeated personal pledges to keep them until prices come back to more reasonable levels.

FDI in the property sector fell 12.4 percent in H1 versus a year earlier. Strip that out of the aggregate data and H1 FDI was down just 0.1 percent versus last year at $46.8 billion.

The FDI data follows a raft of other economic indicators for June, which showed fast-easing consumer prices, outright deflation in producer prices and weak import growth, thanks to shrinking demand at home and abroad.

China's economy slowed for a sixth successive quarter to 7.6 percent in April-June period from a year earlier, its slackest pace in more than three years, dragging down growth in the first half of year to 7.8 percent.

Shen said his ministry was confident of achieving the target of a 10 percent growth in total trade this year set by the government. Commerce Minister Chen Deming said last month the country would hit the target only "if lucky".

External Gauge

FDI is an important gauge of the health of the external economy, to which China's vast factory sector is oriented, but it is small contributor to overall capital flows compared to exports, which were worth about $1.9 trillion in 2011.

A surprising bright spot in the FDI data came from the European Union, where struggles with a festering sovereign debt crisis have seen China's biggest overseas market cut back on orders for goods from Chinese factories.

The Commerce Ministry said FDI from the EU rose 1.6 percent year-on-year in the first half to $3.5 billion, reversing the 5.1 percent year-on-year drop in as the first five months of 2012.

Investments from Germany, Switzerland and the Netherlands rose 31.2 percent, 213.1 percent and 67.3 percent, respectively, on year ago levels.

Meanwhile, FDI inflows from the United States continued to shrink, falling 3.2 percent from a year ago to $1.6 billion, while investment from the top ten Asian countries and regions, including Hong Kong, Japan and Singapore, dropped 2.8 percent to $51.1 billion.

Shen attributed slowing inward investment to global economic uncertainties and rising domestic prices of various production factors, such as labor, and tight land supply.

But he said Beijing's efforts to bolster growth may help revive confidence and draw funds back to the country.

China drew a record $116 billion in foreign direct investment in 2011. The Commerce Ministry aims to attract an average of $120 billion in each of the next four years.

China's own investments overseas meanwhile surged 48.2 percent in the first half of 2012 compared with the first half of 2011, pushing outbound direct investment to $35.4 billion.

Reporting by Aileen Wang and Kevin Yao; Editing by Nick Edwards and Simon Cameron-Moore

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