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Decline in FDI slows for third month

THE decline in foreign direct investment in China slowed in March for the third straight month this year, according to Ministry of Commerce figures released yesterday.

But while the narrowing decrease may spark hope that the slowdown could be bottoming out, some economists cautioned it is too early to conclude that investor interest in the China market has fully returned.

Investment dropped 9.5 percent to US$8.4 billion in March from a year ago, the ministry said at a briefing yesterday in Beijing. That compares with a 15.8 percent decline in February, and a 32.6 percent tumble in January. For the first quarter, foreign spending fell 20.6 percent to US$21.8 billion.

"The year-on-year decline in China's foreign direct investment inflows has been narrowing," Sherman Chan, a Moody's economist, said yesterday. "Any indication that the Chinese economy is still growing at a robust pace despite a severe global downturn would help to boost the mainland's appeal to international investors.

"Meanwhile, some foreign businesses may also try to take advantage of an expected rise in domestic demand in China as the giant fiscal stimulus package is rolled out."

Premier Wen Jiabao said last Saturday that China's economy showed "better than expected positive changes in the first quarter" due to the government's huge stimulus plan. China announced a 4-trillion-yuan (US$586 billion) spending package in November and has increased export tax rebates, funded rural economic development and increased liquidity to revive economic growth.

Some recent economic indicators provide hopeful signs for China, but analysts pointed out that a full turnaround isn't likely without a recovery in the global economy.

"The decline in China's FDI inflows may continue to narrow through the year, but an increase for the full year, while possible, remains a major challenge," Chan said.

Moreover, the gradual improvement in the year-on-year result in March could be attributed to the exceptionally high base set at the start of 2008, in January in particular, Chan added.

Lu Zhengwei, the Industrial Bank's chief economist, echoed the view, saying that foreign spending will continue to drop in the coming months as multinationals face an ongoing credit crunch and a deeper world recession.

The World Bank and the International Monetary Fund forecast a drop in the global economy this year, the first drop since World War II.

Alarmed by the decline in FDI, China issued a series of measures in November. The latest step came in March when the Commerce Ministry decided to give its local branches more power in approving foreign-funded projects. Local officials are allowed to authorize the establishment of foreign-funded firms with registered capital of US$100 million or less.

Though China has been adversely affected by the global downturn, particularly its exports, the country's economy at least is still growing, though at a slower place than in past years.

China's March Purchasing Manager Index rose into expansionary territory last month for the first time in six months. The PMI, a key indicator of activity in the manufacturing sector, rose to 52.4 from 49 in February. Readings above 50 indicate expansion while those below show contraction.

Meanwhile, China's exports declined 17.1 percent in March, recovering somewhat after a sharp drop of 25.7 percent in February.


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