Foreign Investment in China: A Tale of Two Statistics
One of the indicators China bears followed in 2012 to gauge falling confidence in the Chinese economy was the apparent decline in foreign direct investment (FDI). Statistics published by China’s Ministry of Commerce showed that FDI was falling throughout the year, the first such drop since the financial crisis in 2009. Last week China’s central bank published detailed Balance of Payments figures for Q3, which provide an alternative perspective on the inflow of foreign capital into the Chinese economy. They paint a very different picture of FDI flows in 2012.
China’s monthly FDI statistics neglect certain flows: FDI figures published by the Ministry of Commerce only capture new projects from overseas, but they neglect reinvested earnings from foreign companies already operating in China and other flows usually counted as FDI.
Accounting for those flows FDI growth was positive in 2012: Statistics from the central bank accounting for those flows show a much more bullish FDI picture, with positive growth from January through September.
China has become the world’s top destination for FDI: This resilience is even more remarkable in light of a decline in global FDI flows. In the first half of 2012 China surpassed the US as the world’s number one destination for FDI.
Foreign Investors: voting with their feet?
One of the favorite indicators of China bears in 2012 was the inflow of foreign direct investment. After China’s accession to the World Trade Organization in 2001, FDI grew every year except 2o09, at the height of the global financial crisis. In 2010 and 2011 growth turned positive again after China had successfully implemented a stimulus program and remained one of the few bright spots in the global economy. However, since the beginning of 2012, the FDI statistics provided by the Ministry of Commerce showed FDI inflows slowing down and growth dropping into negative territory. This slowdown was interpreted by many to demonstrate eroding confidence in the Chinese market, thus validating hard landing worries.
An alternative perspective on FDI data
Monthly FDI figures are indeed an important indicator of foreign sentiment towards China, but they must be taken with a grain of salt. As a legacy of its history of selective opening to foreign investment, China is one of the few countries in the world that compiles monthly FDI statistics. However, China’s data on “utilized FDI” only include investment in new FDI projects registered with the Ministry of Commerce and largely ignore other components usually included in FDI statistics, such as intra-company transfers and reinvested earnings.
Since 2010, the State Administration of Foreign Exchange (SAFE), an arm of the People’s Bank of China responsible for compiling China’s Balance of Payments (BOP) statistics, is collecting FDI data in line with international standards, providing an alternative to MOFCOM’s figures. SAFE last year also revised the annual FDI statistics in the BOP back to 2004 to account for those previously omitted components. The resulting difference between MOFCOM and BOP figures is tremendous, with annual flows on average higher by 75% in the revised years of 2005-2011 (Figures 1 and 3). This reflects the fact that many foreign firms in China are highly profitable, and that they reinvest profits locally instead of repatriating them back to their headquarters.
Looking at SAFE’s figures, FDI in China in 2012 was not as weak as suggested by MOFCOM’s statistics, and nowhere near the lows of 2009. From Q1-Q3 2012, inflows amounted to $170.2 billion, more than double the $83.4 billion suggested by MOFCOM figures. In fact, in no other year in history have inflows through the third quarter been that high, so we may see 2012 become a new record year for FDI into China, a stark difference from the picture painted by MOFCOM data. Of course the caveat is that SAFE’s BOP figures are preliminary and particularly the reinvested earnings component may be subject to significant revisions in the future.
China is now the Top Destination for FDI Globally
A more important comparator to put MOFCOM’s figures in perspective is global FDI statistics. No matter whether China’s FDI was slightly down (MOFCOM) or slightly up (BOP) in 2012, China still vastly outperformed other locations in attracting foreign direct investment. According to preliminary figures from UNCTAD and OECD, global FDI flows were down by 8-15% in H1 2012. Major FDI destinations including the United States suffered drops in FDI inflows of as much as 40% in the first six months of the year. Flows to China, on the other hand, have been stable, making it the world’s largest destination of foreign direct investment in H1 2012. (Note that China reports the MOFCOM figures to UNCTAD and not the significantly higher SAFE figures.)
The differences in FDI data serve as a important reminder that China’s economic statistics are still not in line with international standards. These inconsistencies allow bulls and bears alike to pick the data points that best fit their narrative. Statistics on cross-border capital flows in particular are often not comparable with similar indicators elsewhere.
A look at foreign investment in China in 2012 using alternative data sets underscores that China is still hugely attractive to foreign investors. Recent FDI patterns must be seen as a vote of confidence in the Chinese economy, not the opposite. And with one of the fastest-growing consumer markets of the world and increasing investment opportunities in modern services and high-tech manufacturing, China will remain a highly attractive destination for foreign direct investment in the years ahead.