http://www.businessweek.com/news/2012-02-16/china-s-foreign-investment-trade-outlook-grim-ministry-says.html
Submitted by Tyler Durden on 02/16/2012 07:37 -0500
Feb. 16 (Bloomberg) -- China’s commerce ministry said the outlook for foreign investment and trade is “grim,” after slowing economic growth and Europe’s debt crisis spurred the third monthly decline in spending by overseas companies.
Foreign direct investment in China fell 0.3 percent in January from a year earlier to $9.997 billion, the Ministry of Commerce said today. Exports last month fell for the first time in more than two years, a Feb. 10 customs bureau report showed.
The drop in investment adds to drags on growth in the world’s second-biggest economy from slumping home sales and slowing output gains as Premier Wen Jiabao sustains curbs on real estate. The government may extend a monetary policy pause as it assesses whether manufacturing and job gains in the U.S. lead to a trade rebound and inflation moderates after an unexpected acceleration last month.
“Wen needs to ease policies to support growth and there’s some evidence of that from the relaxation in curbs on local government financing vehicles and lending,” said Shen Jianguang, chief economist for Greater China at Mizuho Securities Asia Ltd. “Developed economies are holding up better than expected, judging by recent data, and that may dilute the scale of the easing.”
Shen estimates the central bank will cut reserve requirements before the start of the annual session of the National People’s Congress next month and forecasts a total of four reductions this year.
Global ‘Uncertainty’
The benchmark Shanghai Composite Index dropped 0.5 percent at 1:47 p.m. Twelve-month non-deliverable forwards fell 0.1 percent to 6.2858 per dollar, a 0.2 percent premium to the onshore spot rate, according to data compiled by Bloomberg.
“Uncertainty and instability in the world economy is increasing, the pace of international industrial restructuring is slowing,” Shen Danyang, the ministry’s spokesman said at a regular briefing today. “Slack external demand, rising operating costs and funding difficulties faced by some companies” will put increasing pressure on foreign investment, he said.
The People’s Bank of China lowered the amount of deposits banks must set aside as reserves in December, the first reduction since 2008, to encourage lending and support growth. It hasn’t moved since, defying analyst estimates for another cut before the Chinese New Year holiday last month.
Capital Outflows
December’s reduction “was intended to stabilize liquidity conditions in China’s banking system,” said Yao Wei, a Hong Kong-based economist at Societe Generale SA, as banks’ foreign- currency positions declined and foreign-exchange reserves dropped, indicating capital outflows. Monetary easing is likely to be “cautious” in the “near term” due to concerns over inflation and financial stability, she said in a note yesterday.
The PBOC has used and will make more use of so-called differentiated reserve ratios, according to its quarterly monetary policy report issued yesterday, referring to a mechanism where individual lenders hold different percentages of deposits as reserves according to their capital adequacy levels and lending growth.
This indicates “policy has been eased more than the market observed,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. said in a report dated yesterday. “This explains why money market rates dropped without an official reserve- requirement ratio cut in the past two months.”
The published ratio for the nation’s largest banks is 21 percent after December’s 50 basis-point cut. Zhang said the probability of another cut in February has dropped below 50 percent.
Bets Resume
Capital flows into China have rebounded this year, the central bank said in its quarterly monetary policy report yesterday, which may bolster the case for officials refraining from any immediate cuts in required reserves.
January’s trade surplus surged to the highest in six months and bets for yuan appreciation indicated by non-deliverable forwards contracts have resumed after pricing in depreciation from mid November to early January.
Foreign investment in China had its first decline since 2009 in November and the drop deepened to 12.7 percent in December. Spending by companies in the European Union fell 42.5 percent in January from a year earlier to $452 million while investment from U.S. businesses rose 29 percent, the ministry said today.
More U.S. companies plan to increase their investment in China this year, according to a survey from the American Chamber of Commerce in Shanghai released yesterday. Seventy-seven percent of respondents intend to boost spending, compared with 72 percent in 2011, the chamber said.
Hiring Difficulties
Even so, companies are less confident about their business prospects in China amid rising costs, difficulty in hiring and retaining skilled labor and intensifying competition, according to the survey. Businesses are also finding it harder to generate higher profitability, it said.
Changes to the nation’s policies on overseas funding for some industries may also weigh on spending this year. China will stop encouraging foreign investment in industries including automobile manufacturing while opening other areas such as medical services, the National Development and Reform Commission, the nation’s top economic planning agency, and the commerce ministry said in December. The new rules took effect last month.
Companies including Volkswagen AG and Salvatore Ferragamo SpA are still expanding in China, where the International Monetary Fund estimates economic growth will be more than four times faster than the U.S. this year.
Volkswagen Expands
The average disposable income of urban households rose 14 percent last year, government data show.
Ferragamo, the Italian luxury-goods maker, plans to enter as many as eight new Chinese cities over the next three to five years, Chief Executive Officer Michele Norsa said in an interview in Shanghai on Jan. 19.
Volkswagen plans to add a seventh plant in China as it expands production capacity to 3 million vehicles a year, the Wolfsburg, Germany-based carmaker said last month. The factory in the eastern city of Ningbo will have the capacity to assemble 300,000 units when it’s completed by 2014, the company said.
and. ......note the thought as to how much China should kick in - forget hundreds of billions folks ....
Overnight Sentiment Sours As Reality Returns
While these pages have been warning for about a month that a Greek default is precisely what Europe wants, a self-deluded market has been ignoring this reality. That is no longer the case as the default (pardon the pun) thought is now one of Greek default. As for the assumption that "it is all priced in"... that too is being scrapped as revisionist histories of Lehman come to mind. As a result the EURUSD is drifting ever lower, and has been trading with a 1.29 handle for the first time in weeks. Needless to say, Europe is on the verge of panic as the nearly 2-month impact of the LTRO is now truly gone, and with unmistakable stigma (sorry Jernej Omahen - read this) associated with LTRO banks, we shudder at the thought how many banks will voluntarily subject themselves to being seen as desperately needing European Discount Window access in two weeks. Moody's downgrade of key insurance companies and threat to cut most banks, has not helped. Finally, some unpleasant news out of China, where commerce ministry said that the trade outlook is "grim" while a research with the Chinese Academy of Sciences said that Chinese EFSF contribution should be capped at Spain's €92.6 billion, rounds out the rout. So while we wait patiently as reality in Europe truly seeps into risk prices, here is Bloomberg with a summary of overnight catalysts.
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