The FDI Split

CHINA - Report 02 Mar 2015 by FAN Gang and Chunyang Wang

Executive Summary

Exports fell -3.3% y/y in January in dollar terms, down 11.8 pps from Q4. Export weakening was likely due to yuan appreciation against the dollar. Imports fell -19.9% y/y, down 18.3 pps. After correcting for the effects of the Chinese New Year holiday, import figures should also fall further.

CPI rose 0.8% y/y, down 0.7 pps from December. After adjusting for the New Year’s factor, CPI was up 1.3% y/y, still on a declining trend.

The ex-factory price index of industrial products decreased -4.3% y/y in January, and PPI decreased -5.2% y/y. Since the establishment of these two producer price indices in 1987, only two periods have seen bigger falls. The current very low prices support our prediction that further monetary policy loosening is ahead.

M2, the broad money supply, was up 10.8% y/y in January, down 1.4 pps from December 2014, and 2.4 pps from January 2014. M1, narrow money, was up 10.6% y/y, up 7.2 pps and 9.4 pps. M0 was down -17.6% y/y. After considering measurement changes of deposit and loans since January 2015, we estimate that M1 fell too.

On February 28, the People’s Bank of China cut the benchmark one-year lending rate by 25 basis points to 5.35 percent and the one-year benchmark deposit rate by the same amount to 2.5 percent, the second cut in 4 months. The central bank released its Q4 2014 monetary policy report, which mentioned that the next stage of monetary policy should create a neutral, flexible environment for economic structural change. Since policy is explicitly overly tight, this only strengthens our projection that easing is likely.

January FDI was $13.9 billion, according to new Ministry of Commerce data, up a dramatic 29.4%. Outward direct investment (ODI) first surpassed FDI in 2014. FDI has been growing slowly in recent years, but still has risen steadily to $127.6 billion. China is now the world’s biggest recipient of FDI.

Prominent news reports in February emphasized that foreign manufacturing multinationals are withdrawing from China at an increasing pace. Microsoft plans to close two Nokia factories, and shift production to Vietnam; Japanese firm Citizen Holdings has closed its factories in Guangzhou. Panasonic, Sharp and TDK plan to return to Japan, and other multinationals, such as Nike, Fox Conn and Samsung, plan to open factories in ASEAN and India.

We argue that Chinese FDI is experiencing a structural change, undergoing the classic shift from manufacturing to services. On the one hand, China is losing its cheap labor advantage, as it grows richer. On the other, no major multinational can afford to ignore China’s formidable global position. The expansion of free trade zones to Guangdong, Tianjin and Fujian at the end of 2014 particularly emphasized foreign investment in services.

Now read on...

Register to sample a report