FDI fall not caused by antitrust probes

It is predictable that many analysts have intuitionally connected the falling foreign direct investment into China in July to the country's recent antitrust probes, in which a number of foreign companies have been investigated.

Although it is the easiest way to explain for the unexpected drop in international capital flows into the world's second-largest economy, such a willful connection is hardly tenable.

Foreign direct investment into China dropped by nearly 17 percent year-on-year to $7.8 billion in July, the lowest level in two years. It fell by a slight 0.35 percent year-on-year in the first seven months combined.

China's antitrust investigations, however, only intensified and involved more foreign enterprises in the past two or three months. Previously, only a very small number of foreign companies were investigated and still fewer fined for market monopoly or bribery behavior, which should not have shaken the confidence of international investors.

Generally, it takes a long time — usually several months — for foreign investors to make and implement investment plans. They must first have a thorough investigation of the destination market, map out their survival and expansion strategy, hire personnel, and establish marketing and logistics channels, among other things, before they step into the new market.

In other words, the changes in China's July FDI data could have been destined long before China's intensified anti-monopoly investigations in recent months. The effect of antitrust probes should not become apparent until later this year or next year even if it works in thwarting foreign investors.

In reality, China's FDI data have been highly volatile in recent months. It is more advisable for China watchers to wait longer to come to any conclusion as to how the antitrust probes will have a bearing on foreign investors' China strategy.

Since early this year, China's FDI growth rates have been on the decline. In January, it increased by an exceptional 16.1 percent year-on-year. It started to fall sharply from February, with the May reading at a negative 6.7 percent. Although it moved into the positive territory in June, the slump in July shows investor mood remains unstable.

Such an unstable investor confidence could be traced back to China's decision to restructure its economy several years ago as it is set to slow the country's economic growth. As China steps up its restructuring efforts, starting from last year, foreign analysts have been shorting the Chinese economy, citing a slew of unfavorable factors ranging from predicted home price corrections to local government debt pile-up.

Meanwhile, as its economic growth slowed, China has refused to resort to massive stimulus to bail it out, further worsening market concerns that the economy could further slow in the second half of this year.

The July economic indicators, such as fixed-asset investment, retail sales and home sales, show that if China did not take new stimulus measures, the economy could continue to soften.

As the economy weakens, however, the costs of operation, including land, labor and raw materials costs, in China have been rising in recent years, further reducing the profit margins of foreign players. Some of them have shifted their investment to countries with lower cost levels, such as Vietnam.

The volatile FDI trajectory since the start of this year is largely in line with China's worrisome economic landscape.

The changes in the external environment could also be a factor causing the falling FDI flows into China.

The US economic recovery, for example, has been faring well. The Dow Jones stock index has been rising steadily in the past months and the dollar is also on the rise, leading to increased flows of international capital into the world's largest economy.

According to the FDI Confidence Index released by A.T. Kearney, a major international consultancy firm, foreign firms remain very confident in the China market, choosing it as their top priority when they make investment decisions from 2002 until 2012. But starting from 2012, the US has replaced China to become the most attractive investment destination, reflecting diverging changes in the economic fundamentals of the two major countries and the resulting effect on investor confidence.

The change in the Kearney index shows the fact that international capital has responded swiftly to changes in the fundamentals of the Chinese and US economies. Short-term factors, such as the ongoing antitrust probes by the Chinese authorities, could not be playing a major role in driving international capital away from China.