Foreign Investment in China Declines in 2012

Published on Author tyrrell

China, the world’s second largest economy, saw foreign investment fall 4% in 2012, the first drop since the global financial crisis began. The shift was from the record $116 billion in 2011 to $111.7 billion in 2012, and does not necessarily mean that investor confidence in China is waning. Having more than doubled sincd China joined the World Trade Organization in 2001, FDI may simply have reached a plateau between $110 and $120 billion.

In order to improve direct foreign investment, incoming president Xi Jinping is expected to provide incentives by relaxing capital account controls. However, China’s Commerce Ministry believes that it will be difficult for China to increase foreign investment because manufacturing companies are pulling out of China [which is no longer low in cost], though spokesman Shen Danyang points out that there is no large-scale pullout. While foreign investment is an indicator of economic health, it only represents a small fraction of China’s overall [international?] flows, as exports were $2 trillion in 2012 and GDP growth reached 7.8%. FDI in China is at par with the United States, which narrowly edged China in 2012. From NYTimes.

2 Responses to Foreign Investment in China Declines in 2012

  1. See my comment on the ‘Factory’ post and the post of the value of the yuan: ceteris paribus, how would you expect the appreciation of the past several years affect FDI? Second, is FDI important in macroeconomic terms? What share of gross domestic investment does $100 billion represent?

    I tightened prose…the content is somewhat disjointed.

  2. While clearly China’s economy (and in this example foreign investment) may be lower than normal/expected, I think it is important to note that in this case a slowing economy should not necessarily be a cause for great concern. The rate of growth that China’s economy was experiencing a few years ago was unbelievable, but unsustainable. When the economy recently stopped producing on the unreal level that it was a few years ago, a lot of people thought something was wrong. However I don’t believe that the global economy can support the growth of an economy the way China was going forever, so the fact that the GDP growth started approaching a normal rate is expected and possibly even reassuring. Now that China’s economy is not as booming as before, many are worried and incorrectly label it as a “sputtering economy” which I feel may be a contributing factor to the decline in foreign investment mentioned in this article.