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SCMP Reporter

String of data intensifies concerns  about the nation's economic health

Foreign direct investment (FDI) into China fell sharply in August for the second month in a row, adding to a list of concerns about the health of the mainland economy.

Last month FDI slid 28.3 per cent year on year to US$3.3 billion, the Ministry of Commerce said yesterday. This followed a 19 per cent decline in July.

The fall comes after the government issued figures  this week showing a sharp rise in money supply and industrial production, raising fears that inflation and bad debts could rise and threaten the country's rapid growth.

While analysts say the drop in FDI could  help rein in money supply - and by extension bank lending - it will still cause concern among government officials who traditionally view large capital inflows as an indicator of the economy's health and foreign investment as a key growth  engine.

Large investment inflows force the People's Bank of China (PBOC), China's central bank, to exchange the  foreign currencies for yuan. The resulting increase in domestic money supply can fuel inflation.

According to the PBOC, broad money supply soared 21.6 per cent to more than 21 trillion yuan (HK$19.7 trillion) over the first eight months of the year, far outstripping the 1.84 trillion yuan increase recorded last year.

Fears of inflation were further stoked by last month's industrial and factory output figures, which increased about 20 per cent and 17 per cent respectively year on year.

To stem money-supply growth, the bank has resorted to a 'sterilisation' policy, whereby it sells domestic bonds to remove money from public circulation. But this monetary tool works only if there is sufficient investor appetite for the bonds. Whether the drop-off in FDI represents the beginning of a longer-term trend or just a short-term blip stemming from the Sars outbreak remains unclear.

Despite two months of falls, FDI for the first eight months was still up 18.4 per cent to US$36.7 billion. And on Monday, Commerce Minister Lu Fuyuan forecast China would attract a record US$57 billion in overseas investment this year, exceeding last year's all-time high of $52.7 billion.

Some economists say the recent decline in FDI does not indicate an unwillingness among investors to park their money in China.

Citibank economist Huang Yiping said the slowdown of FDI was due to the  government's determination to maintain a stable exchange rate, which has dissuaded speculators hoping to profit from a yuan revaluation, and the delayed impact of Sars.

Mr Huang said the Sars outbreak forced foreign companies to postpone making decisions in the spring, which affected their investments in July and August.

On a positive note, less FDI should reduce pressure on the central government to float the currency. That pressure was stepped up during a visit by US Treasury Secretary John Snow last week.

China has  instituted a series of measures to slow the flood of money into the economy. One key policy change is raising from 6 per cent to 7 per cent the proportion  of total deposits  banks must keep in reserve. That will force banks to keep more money on hand and lend less to borrowers.

WARNING SIGNS

August FDI falls 28.3 per cent to US$3.3 billion

Industrial output increases 20 per cent in August

August factory output rises 17 per cent

Money supply for the first eight months soars 21.6 per cent to more than 21 trillion yuan



Foreign investors cooler on China