China H2 trade outlook severe, inward investment slows

BEIJING Thu Aug 16, 2012 10:16am IST

Residential buildings are seen in Wuhan, Hubei province July 24, 2012. REUTERS/Stringer

Residential buildings are seen in Wuhan, Hubei province July 24, 2012.

Credit: Reuters/Stringer

BEIJING (Reuters) - China's trade outlook for 2012 is worsening, darkened especially by growing problems in Europe, the Commerce Ministry said on Thursday as it revealed the longest run of falling inward investment growth in the economy since the 2008-09 global crisis.

The ministry singled out problems in the European Union - China's biggest overseas market - as the core difficulty for exporters to overcome as it published data showing foreign direct investment (FDI) from the EU fell 2.7 percent year on year to $4.0 billion in the first seven months of 2012.

"Right now, the sharp drop of exports to EU countries is the biggest important factor weighing on China's export growth," Commerce Ministry spokesman Shen Danyang told a news conference held alongside the publication of FDI data.

"With the European debt crisis spreading and the global economy recovering at a slower than expected pace, we expect China's trade situation in the second half will become more severe and we are facing more pressure to meet the annual target for trade growth," Shen added.

China aims to grow total trade by an average of 10 percent in 2012, but shipments have been volatile so far this year.

Data published earlier this month showed China's exports to the EU sank 16.2 percent year-on-year in July to 29.4 billion.

July export growth overall virtually stalled, up just 1.0 percent on a year ago versus the consensus estimate in a Reuters poll of an 8.6 percent expansion. Import growth was 4.7 percent year-on-year in July against expectations of 7.2 percent.

Weaker trade and factory output data and persistent global weakness has led some analysts to question whether the economy would slowly rebound in the third quarter, as many market watchers had expected just a few weeks ago.

China's economy expanded at its slowest pace in more than three years in the second quarter, up 7.6 percent on 2011 as demand at home and abroad slackened, confirming a downtrend that has full-year growth on course for its weakest since 1999.

The consensus forecast in the latest Reuters poll is for growth of 8 percent in 2012.

As exporters battle with a global economic slowdown, falling inward investment is doubly worrying for investors as around 200 million jobs in the country are estimated to be oriented towards the external sector and fixed asset investment generates about half of China's economic output.

The Commerce Ministry said China drew $66.7 billion in foreign direct investment (FDI) between January and July, down 3.6 percent on the same period a year earlier. July's inflow alone was $7.6 billion, down 8.7 percent on-year.

DECLINING CONFIDENCE

"The trend shows declining confidence of foreign investors in China's outlook, which is negative for sentiment," Dariusz Kowalczyk, senior economist and strategist for ex-Japan Asia at Credit Agricole-CIB in Hong Kong, wrote in a note to clients.

The FDI data follows a raft of other economic indicators for July which revealed undershoots in new bank lending, export, import and industrial output growth, prompting analysts to start slicing GDP forecasts and strengthen their calls for more policy easing from the government.

"Less funds means downside pressure on Chinese capital spending growth, and on GDP growth. This boosts the odds of more stimulus," Kowalczyk said.

China has lowered the level of cash banks must keep as reserves in three steps since the autumn, freeing an estimated 1.2 trillion yuan ($190 billion) for new lending, cut interest rates twice and accelerated spending on key state projects as part of its so-called "fine-tuning" pro-growth policy mix.

But it has failed to arrest a slide in economic activity that has persisted for six straight quarters and government advisers say it could slip into a seventh.

Investment flows into China's lynchpin real estate sector - which directly affects around 40 different business sectors in the world's second largest economy - fell 9.3 percent for the first seven months of 2012 versus 2011, but ministry spokesman Shen sought to downplay the significance.

"FDI into the property sector is under effective control," he said.

China has been clamping down on speculative investment into the real estate market for more than two years in a bid to bring home prices down to what Premier Wen Jiabao calls "reasonable levels". Housing has soared beyond the reach of many middle-class Chinese citizens in recent years.

Wen has pledged to stick to the property tightening programme despite slowing economic growth.

Analysts say easing such restrictions would be the fastest way to boost economic activity as investment in the real estate sector was worth 13.6 percent of GDP in the first half of 2012, but it would risk a flare-up in inflationary pressures.

COMPETITION FOR CAPITAL

Besides the year-on-year fall in investment from the EU, the Commerce Ministry also said FDI inflows from Asian countries were also negative on a year-on-year basis.

Investment from the top 10 Asian economies, including Hong Kong, Japan and Singapore, fell 3.8 percent between January and July versus a year ago to $57.3 billion, the ministry said.

Shen attributed the overall drop in FDI this year to a variety of domestic and global factors, including competition for investor attention from India and Brazil, which he said had become the new "hot points" of international direct investment.

Domestically, he said tighter land supply and rising labor costs weighed on activity and it would still take some time for domestic consumption to become a main driver of the economy.

China's Communist Party leadership envisages consumers in the 1.3 billion-strong population becoming the engine of economic expansion in a generation to come.

Shen said that the FDI drop was only temporary and that multi-national companies were still confident about China's prospects, despite data showing a 6.4 percent fall in manufacturing FDI and a 3.2 percent drop in service sector inflows in the first seven months of 2012 versus 2011.

Firms in the United States, Germany, Singapore and Japan appear to bear him out.

Year-on-year data for July showed inflows from Germany jumped 27.1 percent to $1 billion, while those from Singapore surged 25 percent to $4.4 billion and commitments from Japan grew 19.1 percent to $4.7 billion. U.S. inflows ticked 1 percent higher to $2 billion.

China drew a record $116 billion in foreign direct investment last year. The Commerce Ministry aims to attract an average of $120 billion in each of the next four years. It is roughly on course to hit the target in 2012.

China's total outbound direct investment from non-financial firms in the first seven months totaled $42.2 billion, up 52.8 percent year on year.

(Additional reporting by Xiaoyi Shao; Editing by Kim Coghill)

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