Today, KPMG’s Global China Practice (GCP) in Beijing issued the 3rd quarter Investment in China: Numbers and Trends (originally KPMG Review of China’s Economic Globalization).
This quarterly review is a comprehensive overview of China’s current macroeconomic and inbound investment situation. It offers analyses of major economic indicators, overall trends in foreign direct investment, and discusses major inbound merger and acquisition deals for the first three quarters of 2012.
Peter Fung, Global Chair of GCP, remarked: “Chinese economic growth continued to slow during the first three quarters of 2012, but there are signs that things have stabilized, and we’re seeing some leading indicators pointing to future growth. While China’s outbound direct investment grew rapidly over the same period, foreign direct investment (FDI) into China decreased due to the economic slowdown at home and abroad.”
Data quoted in the report shows that third quarter year-on-year GDP growth was 7.4 percent, which represented a new low for the last 14 quarters. However, GDP increased 2.2 percent compared to the previous quarter, creating a new high for the last four quarters. The September Purchasing Managers’ Index (PMI) rose to 49.8 in September versus 49.2 in August, the first increase after four consecutive months of decline. Concurrently, fixed asset investment, industrial value-added growth and net exports all increased by varying amounts. Fung said,”Hopeful signs such as these tell us that, with continued fiscal and monetary policy implementation, the Chinese economy should bounce back in the short-to-medium turn, leading to a U-shaped reversal.”
On the FDI front, third quarter FDI continued to decrease, and saw a 3.8 percent year-on-year decline; there were 18,025 newly established foreign-invested enterprises reported in the third quarter, also down 11.7 percent from a year earlier. Fung’s view is,”The decline in FDI is mostly due to economic stagnation abroad, smaller risk appetites and lower capital investment.” Other emerging and developing markets are attracting FDI growth rates at a faster pace than China. This is partly due to a favorable local cost structure in those particular markets and partly due to total FDI flows that are significantly lower than China’s, resulting in higher growth rates from substantially smaller amounts of investment.
Peng Yali, Head of Research at GCP, analyzed why China’s FDI seemed to be lower this year, “There are two key drivers affecting China’s FDI levels. The first is factors outside of China. It’s no secret that developed economies like Europe and the US have been stuck in an economic malaise the past few years, so, likewise, it’s no surprise that the slowdown has correlated with a reduced willingness to send investment overseas. In the meantime, FDI growth rates have continued to climb in emerging economies in Africa, as well as in India, Brazil and Russia. Multinational companies have spotted the cost opportunity that comes with operating in these countries, and they’re taking advantage of it.”
“The other driver is factors and policies specific to China.” Peng said, “There’s policy support in place here for continued technological advancement and infrastructure improvement. At the same time, the cost of land and general operating costs should continue to trend higher. Also, labour costs have and will continue to rise, with the support of China’s government. These internal factors will continue to influence FDI.”
Last year, China drew a record USD116 billion in FDI. Despite this year’s decline in FDI growth, Peter Fung believes, “China is expected to remain a top FDI destination for the foreseeable future. This is predicated on a practical shift in investment that’s already underway—FDI is shifting from China’s developed cities to lesser-developed cities. It’s a shift in both the quality and structure of investment that’s looked on favourably by the Ministry of Finance. That’s why the ministry has left its FDI target at USD120 billion for each of the next four years. China’s roughly on course to hit that target in 2012.”
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