China’s foreign direct investment (FDI) last month shrank from a year earlier, a fourth-straight fall, with anemic inflows from debt-riddled Europe an additional sign that the People’s Bank of China might act to ensure steady money supply growth.a
The Chinese Ministry of Commerce yesterday said that the country drew US$7.7 billion in FDI last month, down 0.9 percent from the same month last year, while FDI in the first two months of the year fell 0.56 percent from a year earlier to US$17.7 billion.
Given that China’s trade balance plunged to a deficit of US$31.5 billion last month — the largest in at least a decade — analysts said there was a growing likelihood that to keep money supply steady, the central bank would cut the reserve requirement ratios (RRR) for banks.
“Falling FDI and the big trade deficit in February put pressure on capital flows. Capital inflows will be sluggish and there may even be net outflows. From this perspective, it supports the case for more RRR cuts,” said Zhang Xinfa (張新法), an economist at Galaxy Securities in Beijing.
The inflow of foreign capital is a basic component of money supply in the financial system. A fall in its level implies a need to expand domestic credit creation by easing monetary policy in order to keep money supply growth steady.
The central bank has cut RRR from a record high of 21.5 percent in two 50-basis-point steps — the first in November and a second last month — to keep credit flowing.
China targets 14 percent growth in money supply this year.
FDI from the US rose a marginal 0.87 percent in the first two months of this year from a year ago, to US$525 million.
Inflows from the EU, China’s biggest trading partner, were down sharply at just US$906 million in the January-February period, off 33.3 percent from that period last year.
However, data showed China’s more economically buoyant Asian neighbors were putting money to work in the country. Investment from 10 Asian economies — including Japan, South Korea, Taiwan and Hong Kong — rose 2.66 percent in the first two months from a year earlier to US$15.4 billion.
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