Newly released statistics and increasing trade tensions are combining to show a Chinese economy that is softening and losing its attraction for foreign investment. Recent remarks by knowledgeable and discerning investors point to a need for lowered expectations.
Foreign direct investment (FDI) into China fell in August by 1.4 percent, compared to the same period in the previous year, making it the third consecutive month of decline.
Other trade figures continue to weaken. Imports in August failed to grow for the first time in the past seven months. The export growth rate also remained weak in August. Reuters predicted that China’s 2012 GDP growth may drop to seven percent, below the all-important eight percent, and the lowest since 1999.
The Financial Times reports that China’s economy has slowed down, and characterizes domestic demand as insufficient, exports as worrisome, the efficiency of capital allocation as dropping, and profits as slipping, while bad debts are rising, and the economic bubble is bursting.
Prominent investors, sensing that these lackluster stats illustrate that China’s always-seen-as-rosy economic outlook no longer exists and that the rapid growth phenomenon is over, appear to be willing to face reality.
Third Consecutive Decline
Foreign direct investment (FDI) amounted to $8.326 billion in August, which was a drop of 1.4 percent compared to the same month last year, according to the Ministry of Commerce. There was a total of 2,100 newly established foreign companies in China, which was a year-on-year decline of 12.72 percent.
From January to August this year, $74.994 billion in foreign direct investment came to China, down 3.4 percent from 2011. During this same period, investment by the EU and US in China showed a 4.1 and 2.9 percent drop, respectively. Only Japan bucked the trend with an increase of 16.2 percent in her investment in China.
This third consecutive monthly decline in foreign direct investment is an ominous sign as May is the only month this year when FDI showed a positive increase from last year. The Ministry of Commerce also commented that the outlook for foreign trade appears grim as multiple uncertainties and unstable factors are affecting the business environment. For next few months, FDI may even be worse than the period between January and August.
Currently, tension is boiling between China’s trading partners, the EU, the United States, and Japan, and this will cast a shadow on the FDI outlook since these countries are the largest foreign investors.
On Sept. 6, the EU began an investigation into the alleged dumping of solar panels by China, “in what amounts to history’s biggest anti-dumping investigation by value,” according to the New York Times. This is sure to be a thorny topic between the two trade partners.
President Obama formally announced that the United States will file a complaint to the World Trade Organization (WTO), which says that the subsidy provided by the Chinese government to automobile parts and automobiles is hurting the interests of the U.S. manufacturers, according to CNN.
The anti-Japanese demonstrations that have engulfed China for the past week have forced many large Japanese companies to close down their factories in China, for fear of being looted or damaged. This has many observers worried that Sino-Japanese trade will take a hit for a long time.l
GDP Hits 13-year Low
The overall trade data continues to show a very sluggish Chinese economy. Data released by the General Administration of Customs showed no import growth in the month of August, down 2.6 percent from the same month last year, according to state-run media Xinhua.
This value was much lower than the median forecast of a 3.4 percent gain expected in a Dow Jones Newswire survey of 11 economists, and shows that domestic demand continues to languish.
Chinese exports in August showed an anemic growth of 2.7 percent compared to the same month last year. Since exports contribute to 25 percent of Chinese GDP and create 200 million jobs, the weak economic data is devastating to the Chinese economy.
Economists have predicted that this Chinese economic recession will last at least until the third quarter, and the GDP for the year 2012 will drop to a growth rate of 7.7 percent, the lowest recorded since 1999, according to Reuters.
Investors Awaken to Reality
“Is the world of forecasting overly fixated on China’s growth rate staying at 8 per cent? Certainly, investment banks in the past few days have tripped over themselves trying to guess the size of the China stimulus package and whether it’ll keep China on track for that default growth figure,” Rahul Jacob, a Financial Times columnist wrote in his blog.
“Fraser Howie, co-author of Red Capitalism, urges caution. He says that while people have wised up to many of the risks of investing in China in recent years, many are still too bullish and ‘there’s still a lot of wishful thinking.’ One of the most dangerous misconceptions still prevalent, he says, is the idea that the Chinese government is ‘all powerful—that they somehow are better stewards of the economy than in the west,’” according to the Financial Times.
Ray Dalio, founder of the world’s largest hedge fund company, Bridgewater, predicted that growth will decrease to less than five percent in a speech given last week at the Council on Foreign Relations in New York.
What is worse is that the factors that have fueled the rapid growth of the Chinese economy for the last decade are disappearing. First, the Chinese yuan is no longer considered to be undervalued. Second, population growth is at a standstill. Third, investment, which previously contributed to over 50 percent of GDP has likewise reached its limits.
Investors are becoming aware of the stark economic reality in China. The glorious past of rapid non-stop economic growth may very well now be a distant memory.
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