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No need for concern over FDI fluctuations

May 30,2015

New areas of economy expected to attract overseas investment

China's inbound foreign direct investment (FDI) has entered a sort of adjustment period, in which two-way flows of cross-border capital will become normal.

China has been a magnet for international investment in recent years, but now a fierce debate is raging about whether the country is losing its luster for foreign investors. Media reports have mentioned various well-known multinational corporations that have started to withdraw their investment from China.

Japanese electronics giant Panasonic Corp announced in February it had closed its production plant in East China's Shandong Province, marking an end to the company's TV production business, which started in China 19 years ago.

But the news only tells part of the story.

While there have been concerns over some multinational corporations moving their manufacturing bases outside China, some other foreign investors have been speeding up the pace of investing in China.

China's current adjustment period in inbound FDI comes amid the country's shifting of its core competitive advantage away from cheap labor and toward a fast-growing domestic consumer market.

It's normal to see some foreign-backed firms that focus on low production costs withdrawing their investment from China, but other foreign investors will be enticed by the huge consumption potential of the Chinese market. Under a "new normal" of two-way cross-border capital flows, net direct investment inflows into China are still expected to see steady expansion in the coming years.

China has seen fluctuations in the monthly readings of inbound FDI in recent months. Foreign investment flows into China rose by 10.5 percent year-on-year in April, following flagging growth of 2.2 percent in March and 0.9 percent in February.

Fluctuations in the monthly readings for China's inbound FDI are normal and do not mean the inflows are locked into a downward trajectory. The monthly readings can be boosted or reduced by a single big overseas investment project, and the reading for the first four months can better reflect the trend of China's FDI growth than figures for a single month.

According to official data, China's inbound foreign investment rose by 11.1 percent year-on-year in the first four months, indicating that the country still remains a favored investment destination.

As China's economy enters a "new normal" stage, with upgraded industrial structure and a change in competitive advantages, the country will offer new investment opportunities for foreign investors.

The first new investment opportunity comes from the fast-growing consumer market.

There are concerns that China can no longer offer increasing investment opportunities for foreign companies, given that economic growth has slowed to a medium-to-high-speed pattern, from the previous high-speed growth. But these concerns are unnecessary.

China's GDP will increase by $700 billion in one year even if it grows at a medium pace of 7 percent year-on-year, which still represents a large expansion in total economic growth. Japan, for instance, would have to see growth of 14 percent to achieve the same GDP increase.

Meanwhile, consumption demand in areas such as finance, healthcare, culture and information is increasing at a time when living standards are also improving, and this will offer a bigger market for foreign companies that operate in these sectors.

The second new investment opportunity comes from the shift away from an economic model based on blue-collar workers toward one motivated more by white-collar workers. The number of Chinese college graduates is growing quickly but the average salary is still well below that in developed countries, and this is attracting more foreign firms to establish R&D centers in China.

The American Chamber of Commerce in China said in a report in February that one-third of US companies now derive over half of their revenues in China from locally designed, developed or tailored products and services. And almost half of US companies in China - including both R&D-intensive industries and more traditional resource-based and industrial sectors - have established R&D centers in the country. Also, 40 percent of these companies are using the centers not just for China, but also for a broader set of emerging markets.

The third new investment opportunity comes from an improvement of the investment environment. The Third Plenary Session of the 18th Central Committee of the Communist Party of China called for ramped-up reforms in fields including finance, culture, health and other service sectors, and progress in these areas is helping to improve China's investment environment and speeding up the process of opening-up to the outside world.

China's economy will provide more investment opportunities for foreign capital as the country moves forward into a "new normal" stage, and inbound foreign direct investment is expected to keep growing at a higher speed compared with the global average, despite two-way cross-border capital flows.