FDI fall not caused by antitrust probes

Such an unstable investor confidence could be traced back to China’s decision to restructure its economy several years ago as it is set to slow the country’s economic growth. As China steps up its restructuring efforts, starting from last year, foreign analysts have been shorting the Chinese economy, citing a slew of unfavorable factors ranging from predicted home price corrections to local government debt pile-up.

Meanwhile, as its economic growth slowed, China has refused to resort to massive stimulus to bail it out, further worsening market concerns that the economy could further slow in the second half of this year.

The July economic indicators, such as fixed-asset investment, retail sales and home sales, show that if China did not take new stimulus measures, the economy could continue to soften.

As the economy weakens, however, the costs of operation, including land, labor and raw materials costs, in China have been rising in recent years, further reducing the profit margins of foreign players. Some of them have shifted their investment to countries with lower cost levels, such as Vietnam.

The volatile FDI trajectory since the start of this year is largely in line with China’s worrisome economic landscape.

The changes in the external environment could also be a factor causing the falling FDI flows into China.

The US economic recovery, for example, has been faring well. The Dow Jones stock index has been rising steadily in the past months and the dollar is also on the rise, leading to increased flows of international capital into the world’s largest economy.

According to the FDI Confidence Index released by A.T. Kearney, a major international consultancy firm, foreign firms remain very confident in the China market, choosing it as their top priority when they make investment decisions from 2002 until 2012. But starting from 2012, the US has replaced China to become the most attractive investment destination, reflecting diverging changes in the economic fundamentals of the two major countries and the resulting effect on investor confidence.

The change in the Kearney index shows the fact that international capital has responded swiftly to changes in the fundamentals of the Chinese and US economies. Short-term factors, such as the ongoing antitrust probes by the Chinese authorities, could not be playing a major role in driving international capital away from China.