FDI in China Slowing -- Not a Bad Thing

by: Steven Towns

In today's Wall Street Journal, Andrew Batson discusses foreign investment trends in China in: China Loses Some Allure As a Manufacturing Hub.

On a global basis, China's receipt of foreign direct investment dropped slightly in 2005 and is down 0.5% in the first half of '06, hurt by a 12% tumble in April. However, FDI inflows continue to be huge at approx. $60 billion annually -- but will fall in size proportionately as long as China keeps growing at a double-digit clip. Essentially this development should be viewed positively since it means China is moving up the value chain as it diversifies its industrial base. Higher wages and land prices are making China less competitive against other Asian countries such as Vietnam, Malaysia, and Indonesia. Although no one is expecting a mass exodus of foreign manufacturers, the author of the article Baston points out:

"In a way, China has become a victim of its own success. So much of the Asian electronics industry has already relocated to China that there is little left to move. And for other big investors, there are limits to how much more they can realistically put in."

The tone of the article supports the idea that slowing FDI isn't necessarily bad news. Nicholas Kwan, an economist at Standard Chartered Bank in Hong Kong is quoted saying:

"You don't want to be a place that can only attract low-end industries. Increasingly, the quality matters more than the quantity."

Comment/Resources: Just to show you far along this trend of slowing FDI is, consider the fact that FDI into China from Japan, South Korea, and Taiwan fell 6.5% in 2005 and is down by 31% in the first half of '06. And U.S. FDI into China has decreased every year since 2003 according to Chinese statistics. This isn't so worrisome to Beijing because the slowing is most likely concentrated on manufacturing while Beijing is maintaining limits on foreign investment in key service sectors in spite of what is almost assured strong foreign investor interest. Follow news and analysis of Chinese stocks that trade in the U.S. and U.S. companies doing business in China at China on SeekingAlpha. Also see my recent summary of a WSJ article about Beijing's decision to allow limited offshore investment by its citizens. Although the limitations imposed are likely frustrating for citizens and disappointing for investors in Chinese stocks, it too has a positive takeaway, as being a step in the right direction.