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Tuesday, March 9, 1999 Published at 14:36 GMT

Business: The Economy

Investment in China to plummet

Sources of past investment are unable to help China's economy

Foreign direct investment (FDI) in China is set to drop by more than 56%, according to a senior official, trade economist Ma Yu.

This will take foreign direct investment from the 1998 official figure down to less than $20bn (£12bn). China is struggling to maintain economic growth, and has its largest budget deficit for 20 years.

Export growth is also slowing, and foreign banks are refusing to offer new loans with some of China's largest "red chip" companies facing ruin.

In an interview with AFX-Asoa, the director of the Trade Ministry Research Institute's foreign capital department said the economy seemed to have worsened. The slowdown in investment will add to the difficulties in China meeting its growth target this year.

[ image: China's private economy has grown hugely since reforms]
China's private economy has grown hugely since reforms
"On the basis of the current situation, I think the final figure could be even lower than this," said Mr Ma.

China is suffering from the "three fewers", he said, describing them as:

  • Fewer projects under negotiation;
  • Fewer awaiting approval;
  • Fewer agreed investments being carried out.

Mr Ma put the decline largely down to the Asian financial crisis. He said that "countries affected by the crisis are bottoming out, and some will see their situation improve".

This would mean that more capital will be absorbed by these countries, he said.

Weak investment sources

He explained that key sources of past investment such as Taiwan, Hong Kong, South Korea and Japan are also too weak to inject fresh capital into China.

Between them, they accounted for about 70% of China's FDI, and their loss was being keenly felt.

He said there was already strong evidence of a decline in in-bound FDI from Taiwan.

He said last year's figure of $45.6bn in paid-in FDI was exaggerated.

"Local governments inflated a lot of statistics to ensure that the 8% (economic growth) target was reached," he said.

He claimed the target had been exaggerated by about $15bn, and forecast that the FDI will fall by about 30% this year.

Scepticism about data

Government figures show gross domestic product growth slowed slightly to 7.8%. But there is widespread cynicism about the data, as record number of listed firms are reporting losses, and price deflation remains around 1%.

Earlier this year Mr Ma said China's ability to counter falling FDI from Asia by attracting more from the West was restricted.

In an interview with the Economic Information Daily, he blamed the country's reluctance to accept foreign ownership in key industries.

For the first time, China will allow large numbers of foreign investors to set up joint ventures (JVs) with private enterprises, according to Shanghai's official Liberation Daily. This is an attempt to revive economic interest.

Investors seek freedom

JVs have helped sustain overseas investment in China since market reforms first took hold in the early 1980s.

Capital is usually provided by foreign companies, who can also supply technology and managerial knowledge.

But during the past two years, wholly foreign-owned ventures in the last two years began to outnumber JVs for the first time. Investors increasingly sought freedom to manage independently.

The private economy which now exists in China has grown hugely since the start of the reforms. It received barely any backing from the country's communist leaders, and was tolerated rather than encouraged.

But since the end of last year, Beijing has introduced measures to boost the status and growth of the mostly smaller-scale firms. It is hoped they will help revive flagging economic vitality.

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