* FDI runs at record pace in Q1, big jump after Lunar
holiday
* FDI momentum is slowing though and trade outlook difficult
* Suggests policy will be biased towards supporting economy
By Zhou Xin and Nick Edwards
BEIJING, April 17 (Reuters) – China bagged foreign direct
investment at a record-setting pace in the first three months of
2012, but an easing in its monthly momentum and a difficult
trade outlook will keep monetary policy poised to compensate for
any dip in capital inflows.
The first quarter inflow of $29.8 billion leaves China on
course to surpass 2011’s $116 billion record, even though
inflows compared with a year earlier have fallen for five
successive months, Commerce Ministry data showed on Tuesday.
A 53 percent leap in inflows to $11.8 billion in March from
February – typical after the Lunar New Year – was a fresh sign
that capital flow is firming enough to underpin money supply
growth, following a $124 billion first-quarter jump in foreign
exchange reserves, providing policy stays on its current
pro-growth bias.
“I don’t think this changes anything for monetary policy,”
Alistair Thornton, economist at IHS Global Insight in Beijing,
told Reuters.
China’s government has been fine-tuning economic policy
settings since the autumn of last year as the outlook for the
global economy darkened, export growth sank and capital inflows
– a core component of money supply – stalled.
The People’s Bank of China (PBOC) has cut by 100 basis
points the ratio of deposits banks are required to keep as
reserves (RRR) to keep credit and money supply growth steady.
The two moves added an estimated 800 billion yuan ($127 billion)
of lending capacity to the economy.
The PBOC said last week that broad money supply rose 13.4
percent in March from a year earlier, stronger than market
expectations for 12.9 percent and ahead of the previous month’s
13 percent pace.
Economists forecast another 150 bps, or 1.2 trillion yuan in
RRR cuts for the rest of 2012 to help cushion China’s worst
slowdown since the global financial crisis of 2008-09.
“There are signs that the economy has reached a bottom, but
there’s nothing to suggest in recent data that equity investors
should be positioning for a strong rebound or anything like a
V-shaped recovery,” Thornton said.
EXTERNAL DEMAND
China’s economic growth has slowed for five straight
quarters. The annual growth rate in the first quarter eased to
8.1 percent from 8.9 percent in the previous three months, below
an 8.3 percent consensus forecast in a Reuters poll.
Reasonably strong FDI and a return to an overall trade
surplus of $5.35 billion in March heralds the prospect that a
revival in global growth is lifting overseas demand just in time
to compensate for a slowdown in the pace of domestic activity.
FDI is an important gauge of the health of the external
economy, to which China’s vast factory sector is orientated, but
is a small contributor to overall capital flows compared to
exports, which were worth about $1.9 trillion in 2011.
Ministry of Commerce spokesman, Shen Danyang, told a news
conference on the FDI data that the government was confident of
achieving its target for trade growth in 2012 despite a
difficult international economic backdrop.
China targets 10 percent growth for exports and imports in
2012, but both goals were missed in March when imports rose 5.3
percent and exports increased 8.9 percent over a year earlier.
Beijing has pledged to bring its current account into
balance as it refocuses the economy more towards domestic
consumption and away from volatile foreign demand for
manufactured goods.
China’s two biggest export markets faltered through 2011.
Demand from the European Union was dogged by the sovereign debt
crisis, while a U.S. recovery was slow to take hold, especially
among consumers.
For the first quarter as a whole, Customs Administration
data from China shows the value of total exports was $430.02
billion, while imports were $429.35 billion – bringing the trade
account roughly into the balance targeted by the government.
“If we want export growth to be stable, we must ensure that
policies are stable,” Shen said. “If there are any policy
adjustments, these adjustments will be more towards pro-exports
rather than limiting exports.”
CURRENCY RISKS
But he said some exporters were nervous about the outlook
for their business, particularly after China loosened its
tightly controlled currency regime by doubling to 1 percent the
daily trading band for the yuan against the dollar.
“Some exporters are a little bit worried, so they are not so
sure about taking long-term orders, but only took short-term
orders, mainly because they are not confident in managing
exchange rate fluctuations,” Shen said.
The change, a crucial one as China further liberalises its
nascent financial markets, underlines Beijing’s belief that the
yuan is near its equilibrium level, and that China’s economy is
sturdy enough to handle important, long-promised, structural
reforms despite its cooling growth trajectory.
Slower growth is cautiously welcomed by China’s leadership
as it allows them to make reforms, particularly to prices the
government sets, with a reduced risk of igniting inflation that
the ruling Communist Party fears could trigger social unrest.
The widening of the yuan’s trading band is the most
significant adjustment made to China’s currency regime since a
landmark decision in 2005 to de-peg the yuan from the dollar,
which set the Chinese unit on an appreciating path that has seen
it gain about 30 percent against the dollar.
In tandem, China has encouraged direct settlement of
international trade in yuan, amounting to 2.08 trillion yuan
($333 billion) in 2011, more than triple that in 2010, central
bank data shows.
Dariusz Kowalczyk, senior economist and strategist at Credit
Agricole CIB in Hong Kong, said 11.7 percent of March FDI flows
were settled in yuan, up from 9.5 percent in February, 8.5
percent in January and 3.2 percent for all of 2011.
“Direct investment has become a new frontier for Chinese
yuan internationalisation,” he wrote in a note to clients.
Beijing targets $120 billion in FDI inflows for each of the
next four years, drawing up new rules to encourage foreign
investment in strategic emerging industries, particularly those
that bring new technology and know-how to China.
The Q1 numbers are on course to achieve that.
“For foreign investors, China remains attractive compared to
other countries,” Zhao Hao, economist at ANZ Bank in Shanghai,
said.
China’s efforts to expand its own direct investments in
foreign countries are surging. Outbound FDI rose 94.5 percent in
the first quarter versus a year earlier to $16.55 billion.
“In the future, the trend is that FDI inflows will pick up
while outbound FDI will rise even faster, so the net inflows
will fall,” Zhao said.
