Macroscope | China sees investment chill

The People’s Republic of China is far from rich, with average per capita disposable income officially at US$3,300 in 2014 – less than a tenth of the US$38,000 in the United States.

There should be, as increasingly defensive China bulls point out, plenty of investment opportunities available to unlock wealth. It is therefore a bad sign if investment interest falls – as it did last year.

In the second half of 2014, the mainland claimed a combined goods and services trade surplus of approximately US$120 billion. Yet foreign exchange reserves dropped US$150 billion.

This is not to say there was US$270 billion in capital outflow as there are multiple components in the balance of payments, plus particular Chinese practices, to account for. Nonetheless, net outflow in the second half was sizeable, perhaps even US$200 billion. That might not dent the US$4.8 trillion in foreign currency in the banking system, but it is a rejection of China as an investment destination.

Some balance of payments components see volatile movements and outflows can become inflows in short order. Unfortunately, the problem includes more durable spending.

China reported that inbound foreign direct investment (FDI) was basically flat at US$120 billion in 2014. This masks underlying weakness.

According to the National Bureau of Statistics, real estate investment soared 20 per cent versus 2013, past US$34 billion. Chinese real estate is hardly thriving and this money is unlikely to be genuine investment. Rather, it is money parked in Chinese real estate awaiting better opportunities somewhere.