China's FDI slowdown just a blip, as the landscape is reshaped

There was initial alarm in some quarters at China’s recent FDI drop, with a number of commentators suggesting that it showed the reduction in appeal of China’s market for investment, amid concerns over an economic slowdown and investigations into a number of foreign firms.

FDI fell at its sharpest rate since the financial crisis, down to US$7.2 billion in August 2014 – the lowest monthly total since July 2010. This was 14 per cent lower than the same month in 2013.

There are a number of reasons why such a drop has occurred. Firstly, there are concerns over a potential property bubble burst in China as the economy slows down, forcing China again to lower interest rates.

Another reason is the multiple probes from Beijing into foreign companies regarding anti-monopoly laws, ranging across sectors from automobiles and pharmaceuticals to food products.

However, such concerns have been quickly denied by the government. "It is only normal that there is volatility of FDI in individual months when China steps up efforts to balance the economic structure…It is not sufficient enough to reflect the general trend. It must not be linked to the anti-monopoly probes into some foreign invested companies or be associated with other baseless speculations," Commerce Ministry spokesman Shen Danyang recently told reporters.

Another reason for the overall drop is perhaps down to one specific reduction in FDI. Investment from Japan into China has dropped markedly as diplomatic relations have soured over island disputes and historical issues, with the total falling 43.3 per cent in the first eight months of 2014.

Although overall FDI has also fallen from the US and Europe, this is in part due to a change in China’s needs regarding FDI as it looks to reshape its economy and move even further away from heavy manufacturing.