March 17, 2015 / 2:18 AM / 3 years ago

China February FDI grows at slowest pace in six months, outbound flows jump

A woman walks at the Bund in front of the financial district of Pudong in Shanghai March 5, 2015. REUTERS/Aly Song

BEIJING (Reuters) - Foreign direct investment (FDI) in China grew at its weakest pace in six months in February, but analysts caution that seasonality may explain the swings even as a weakening economy continues to dent investor confidence.

February FDI rose just 0.9 percent from a year earlier, slowing sharply from a 29.4 percent jump in January, adding to mostly weak February data, which has raised expectations of further policy steps from Beijing to spur growth.

“We expect FDI to maintain slow growth this year, probably similar to last year,” said Zhao Hao, China economist at ANZ in Shanghai.

“China’s manufacturing sector faces overcapacity and foreign investment into some other sectors is subject to high barriers.”

February FDI of $8.6 billion was down 38 percent from $13.9 billion in January.

Analysts, however, caution not to read too much into the weak February FDI numbers as seasonality could cause swings. China’s Lunar New Year holiday, which causes strong seasonal distortions, began on Jan. 31 last year but started on Feb. 19 this year.

For January and February combined, inbound FDI rose 17.0 percent from a year earlier, to $22.5 billion, the Commerce Ministry said on Tuesday.

Exceptionally strong rises in FDI inflows in the first two months of the year, including a nearly 874-percent jump for Saudi Arabia and a 367-percent gain for France, were due to one-off deals, commerce ministry spokesman Shen Danyang said.

Investment from the United States fell 31.8 percent from a year earlier, while that from Japan slumped 15.9 percent.

China’s pledge to shift away from manufacturing and heavy industry and find new growth drivers in services and consumption was evident in the inbound investment flows: In the first two months of the year FDI into the service sector shot up 30 percent, while investment into manufacturing grew only 7.1 percent.

FDI in China rose just 1.7 percent in 2014, the slackest pace since 2012. The weak performance underscored a cooling economy which is spurring more Chinese firms to plow money into assets overseas in a trend that is soon set to overtake inbound investment.

Indeed, data from the ministry showed that China’s non-financial outbound direct investment surged 68 percent in February from a year earlier - the strongest rise in five months.

Outbound investment for January and February combined rose 51 percent to $17.4 billion.

The government has been encouraging Chinese firms to invest abroad to help them become more competitive internationally, utilize their surplus capacity, and help slow down the rapid build-up of foreign exchange reserves.

Last year, China drew a record $119.6 billion worth of FDI, while outbound investment rose 14.1 percent to a new high of $102.9 billion.

Reporting by Kevin Yao; Writing by Jake Spring; Editing by Shri Navaratnam and Jacqueline Wong

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