According to a statement issued by the Ministry of Commerce today, foreign direct investment in China dropped to the lowest level to be seen since 2010. This is the latest in a spate of worrying economic data releases for July which highlight decreased confidence in the country’s prospects for growth.
Following the news that export growth crumbled in July, whilst lending and industrial production were below the forecast levels, the figures released today are far from welcome. The Ministry of Commerce data has shown that investment for July dropped for an eighth month, down to $7.58 billion – 8.7 per cent less than for the same month of the previous year.
The report indicates that a weakening yuan and slowing growth has contributed to capital surging out of the country over the course of last month, with financial institutions selling a net 3.8 billion yuan of foreign currency.
Action is now needed to restore investor faith in China.
Speculation regarding governmental cuts to bank’s reserve requirements was enhanced yesterday when it was asserted by state media that Premier Wen Jiabao had hinted there was room for adjustment of monetary policy. Nomura Holdings Inc have even predicted that The People’s Bank of China will probably cut reserve requirements within the next two weeks.
Wen was also cited as saying that the economy has undergone positive changes in recent months. He made particular mention of the stability of the job market, that eastern region industrial output was on the up and that domestic demand was being more supportive of economic growth.
Despite Wen’s positivity, a chief Asia economist for Mizuho Securities has stressed the importance of taking immediate steps to bolster the economy. Shen Jianguang stated: ‘Boosting confidence is very important and it needs action. The government needs to reduce the tax burden for companies and cut the reserve ratio and interest rates to support growth.’
Although China is aiming for growth of 10 per cent in trade for 2012, there are increasing fears amongst investors that China’s slowdown may endure for a seventh quarter.
One spokesman for the Commerce Ministry, Shen Danyang, commented that the situation could worsen in the months to come. During today’s briefing Danyang said; ‘In the second half, China’s foreign trade and export situation will be more grim, there will be more difficulties, harder tasks, and the pressure of achieving the full-year target will be bigger.’
With analysts foreseeing further declines in foreign direct investment for the nation boosting investor confidence may be an uphill struggle.
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