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China May FDI falls by most in 16 months as economy slows

People stand outside a UNIQLO shop in Beijing, August 24, 2013. REUTERS/Petar Kujundzic

By Aileen Wang and Koh Gui Qing

BEIJING (Reuters) - The amount of new foreign investment that China attracted in May shrank by the most in 16 months, hurt partly by its cooling economy, though the trade ministry said the outlook may be brightening for exporters.

The Ministry of Commerce said on Tuesday that China attracted $8.6 billion in foreign direct investment (FDI) in May, down 6.7 percent from a year ago and the weakest performance since January 2013.

Cumulatively, China drew $49 billion of FDI in the first five months of 2014, up 2.8 percent from a year earlier, also the worst showing in a year.

Slowing momentum in the world's second-largest economy, with growth forecast to slide to a 24-year low this year, may have deterred companies from ploughing more cash into China, economists say.

Widespread expectations that the yuan will edge lower this year and political tensions affecting trade could also have encouraged firms to delay new investments.

"On a macro level, there is indeed a trend of foreign companies investing less in China," said Zhou Hao, an economist at ANZ Bank in Shanghai.

"Slowing economic growth is the main reason, but the high barrier of entry into China for new companies is also a factor," said Zhou, referring to the dominance of Chinese firms in most sectors.

Ever since China's entry into the World Trade Organisation in 2001, its FDI has ballooned to record levels -- inflows hit a record $118 billion last year.

But even as the amount of FDI scaled an all-time high, the growth momentum has steadily moderated, with authorities predicting that China's outbound investment will soon exceed its investment inflows.

That trend was not apparent in May, however. Non-financial direct outbound investment fell 10.2 percent to $30.8 billion in the first five months. China does not publish its financial outbound investment on a monthly basis.

Shares in Hong Kong and China extended initial losses after the weak investment data.


Economists polled by Reuters in April predicted that China's annual economic growth will fall to a 24-year low of 7.3 percent this year, but still in line with the government goal to expand activity by "around 7.5 percent".

To bolster flagging growth, Beijing has announced a series of modest stimulus measures since April, including lowering reserve requirements for some banks to release more money for loans.

Business surveys in the last week signal activity may be starting to stabilise, but a slight pick-up in parts of the economy does not mean a solid, broader recovery is under way.

But the Commerce Ministry sounded hopeful on Tuesday.

"Trade growth is expected to stabilise in the coming months," Shen Danyang, the ministry's spokesman, told a regular monthly briefing.

"Beijing has launched a slew of measures to underpin the trade sector and we can see exporters' sentiment is also being boosted."

In the first five months of the year, China's services sector attracted $27.5 billion of FDI, up a fifth from a year ago and faring much better than the manufacturing industry, where FDI dropped 16.5 percent from a year ago to $17.4 billion.

Among the 10 countries that are the biggest sources of China's FDI, investment from South Korea surged 88 percent on an annual basis and that from the United Kingdom leapt 62 percent.

In contrast, investment from Japan, whose ties with China have long been strained by territorial disputes and residual anger over World War II, FDI plunged 42 percent from a year ago.

The drop is much sharper than a 9 percent decrease in FDI from the United States, and a 22 percent fall in FDI from the European Union.

Shen warned that political tensions between Asia's two biggest economies will harm bilateral trade -- an outcome that he said Japan has to take responsibility for.

In an attempt to encourage FDI inflows, China last month relaxed rules in a range of sectors, including in sensitive industries such as aerospace. It also gave provincial governments more power to approve projects to quicken the pace of investment.

Plans to launch free trade zones in Shanghai and in other regions, along with a series of financial and market reforms, are also meant to attract more FDI in years to come.

(Editing by Jacqueline Wong)