FDI drops over EU debt crisis

Third straight month of decline prompts ministry warning

BEIJING / BRUSSELS - Foreign direct investment dropped for the third straight month in January as European investment plunged by 42 percent from a year earlier.

The slump in European investment was instrumental in causing a slight fall of 0.3 percent in FDI.

The drop prompted a warning from the Ministry of Commerce over the "grim" outlook for FDI.

But the ministry stressed that, long term, China remains an attractive investment destination.

FDI from the 27 European Union nations shrank 42.5 percent year-on-year to $452 million last month, the ministry said on Thursday.

Ministry spokesman Shen Danyang attributed the sharp drop in investment from the EU to "the spreading debt crisis" and the weakening economy resulting in reluctance to invest overseas.

In 2011, FDI from the EU dropped by 3.7 percent to $6.35 billion.

Zhang Haiyan, program director at the Euro-China Centre of the Antwerp Management School, said the drop needs attention. "European companies are cautious regarding capital flow because of the ongoing crisis," Zhang said.

Christos Vlachos, director of the China-Greece Business Chamber, said Europe's Christmas holiday and China's Lunar New Year should be factored in.

The European retreat contributed heavily to the overall FDI drop. January saw FDI worth $10 billion, down by 0.3 percent from a year earlier.

January's decrease followed a 12.7 percent drop in December and a 9.76 percent decline in November, the first year-on-year drop since 2009.

In contrast, non-financial outbound direct investment in January surged by 60 percent from a year earlier to $4.38 billion.

The ministry expressed its concern about FDI prospects in the coming months.

"The outlook for China in attracting foreign direct investment this year is fairly grim," Shen said at the monthly news briefing.

He attributed this to unstable and sluggish global economic growth, weak demand, difficulties in financing and rising operating costs.

But Shen said China enjoys comprehensive advantages in absorbing FDI, citing fast economic growth, expanding domestic consumption and a regulatory framework.

Vlachos agreed. Although Europe appears to be reluctant to invest at this juncture, the record indicates that the EU will be a major player again, he said.

Europe remains "confident in China and I think FDI will increase in the coming months if China offers more incentives", said Leo Weller, global economist at London-based risk analysis company, Exclusive Analysis.

Recent reports by chambers of commerce in China from the United States, the EU and Japan showed foreign enterprises are willing to invest.

Global investors will come back to the Chinese market in the coming months, experts said.

China was ranked as the most attractive FDI destination among developing nations for almost two decades. Last year, the nation's FDI set a record high of $116 billion.

Turning to grow

Investment from the US in January jumped by 29.05 percent to $342 million, the ministry said.

"Many American companies say they have full confidence in investing in China," Shen said.

Investment from 10 Asian economies, including Japan, gained slightly by 0.8 percent to $8.59 billion.

The US remains a major source for FDI. By the end of last year the accumulative FDI absorbed from the US reached $67.6 billion.

"American enterprises operating in China have reaped fairly good benefits, and China has become a source of profit for their headquarters," Shen said.

A report released by the US Chamber of Commerce in China on Wednesday said that 80 percent of the American enterprises interviewed said they plan to increase investment in China this year. The figure was 75 percent for 2011.

Li Jiabao contributed to this story.