Further declines in FDI

While the mainland's inflow of short-term capital is increasing, the outflow of long-term capital continues to accelerate

Unlike the declining inflow of long-term capital, the flow of short-term capital into China has shown signs of increasing, especially after the adoption of a loose monetary policy in the United States and Europe.

In September, the funds outstanding for foreign exchange held by domestic financial institutions increased by 130.6 billion yuan ($20 billion). This reversed the decline in China's funds outstanding for foreign exchange over the previous two months, an indication that overseas capital has started coming to China again. At a time when the return ratio of US Treasury bonds is at a low level and the recovery of its real economy is proceeding at a snail's pace, there is a greater possibility of overseas capital, driven by the pursuit of higher profits, to flow to the global bulk commodity market and emerging nations.

However, there has been an accelerated withdrawal of transnational capital from China since the end of 2011, as indicated by its dwindling foreign reserves, the decrease of its funds outstanding for foreign exchange, as well as the continuous decline of its utilized foreign funds. Statistics indicate that from November to May inbound foreign direct investment to China increased by a negligible 0.05 percent year-on-year, before registering negative growth in the following months. In September, it was down 6.8 percent year-on-year.

The global economy is likely to take a turn for the better in 2013 as the European debt crisis is expected to subside. However, with the advancement of global efforts for economic rebalancing and the decline of capital return ratios in emerging markets, the large-scale net capital flows to emerging economies is slowing.

Overspending, over-borrowing and excessive dependence on exports are being rectified across the world. But the protracted deleveraging campaign launched by some developed countries in the context of the sovereign debt crisis in the eurozone will inevitably cause the continuous return of overseas capital. The ever-dwindling global demand also means that the golden period for China's exports is over and the economic value of its labor-intensive manufacturing will decline.

After decades of subsidizing globalization with its low prices, China is now on its way to re-evaluating the prices of limited factors of production. The underrated prices of essential factors of production have long been the crux of China's current economic growth model, its internal and external economic imbalances as well as its low-grade industrial structure. The low cost of labor and land, low environmental cost and comparatively developed industrial auxiliary system have helped China avoid the negative effects caused by its diminishing marginal return on capital. However, with reform of its income distribution system and its resources pricing mechanism, the inbound FDI is expected to gain a declining profit margin in China.

With the rise in prices of factors of production, overseas capital is likely to transfer from China to other lower-cost countries. According to a report from the US Chamber of Commerce in late August, 21 percent of US companies now have plans to transfer some of their investment or business from China to other lower-cost Asian nations, such as Malaysia, Vietnam and Thailand. It is reported that Germany and other European Union countries also intend to increase their investment in some small and medium-sized emerging economies.

The accelerated re-industrialization strategy embraced by the Barack Obama administration in the US and the plan it unveiled to re-forge the global industrial chain through promoting the return of its overseas capital will strengthen its weakened manufacturing sector, which will possibly turn the US from a net FDI exporter to a net importer in the future. This, along with the US' various advantages and its huge attractiveness to global capital, will slow the flow of global capital to China.

A temporary influx of short-term capital into China and other emerging economies is not expected to change the trend of long-term capital outflow.

The author is an economics researcher with the State Information Center.

(China Daily 10/24/2012 page8)