Don’t Worry About China’s Exports. Worry About FDI

Wednesday, December 10, 2008 21:25
Posted in category Invest in China

The last week has confirmed a number of the fears I had when first looking at the global economic ripples that China was exposed to.

It was abundantly clear early on that consumers in the west were going to tighten up and that this would filter back to China through exports at some point.  Confirmed yesterday, this is a process that I think many were prepared for already, and I am quite happy knowing that the falloff was only2% from last year’s level.  It is simply amazing.

Where I was concerned 2 months ago, was FDI.

Simply put, while the focus on the financial crisis has been for the most part on the mortgage credit, and to some degree the access of firms to trade credit instruments, the credit needed to fund capital investments has not really been discussed.

Funds that firms use to expand their geographic presence, invest in equipment, buy land, build factories, and fund R&D – capital investments – are funds that the Chinese economy have benefited greatly from (as a trip to Suzhou will clearly prove).

For me, a 36.5% falloff in FDI has one message and two impacts

The message – the credit seizure we have been witness to has forced large and medium sized firm to move to making decisions without credit, and these firms do not have the confidence to make further investments in the Chinese economy.

Note 1 – when I say “these firms”, I mean manufacturers do not see the business case for a new factory in China and I mean that real estate funds do not see the case for investment in China’s buildings

Note 2 – When I say “do not have the confidence”, I mean at this time.  Investors are waiting for the bottom of the market and manufacturers are waiting for credit to turn back on. When these events occur, the situation will change.

However, until the turn around occurs, there are two significant impacts that I can see:

1) As the manufacturing sectors come off, the economic reverberations will run deep into the population.

Lay offs are already occurring in some sectors (hiring freezes are in many more sectors) – but the situation will continue to roll down hill as suppliers begin to cut back, as logistics firms no longer need to hire warehouse workers, as independent truck drivers sit idle.

Which will further roll down to those industries that support them.

2) With the manufacturing sector coming off, a lot of cities are going to tighten their infrastructural investment.

this is an area that I think has still yet to be analyzed.  Many decoupler economists used to point to the level of government investment in the economy as the reason why China could sustain a decoupling of the economy, but no one has pointed to the cities of Suzhou, Tianjin, Shantou and said that the vast majority of the money in those economies was for the foreign based economies.  that the investments made in those cities would attract foreign investment into the economy, which would in turn grow the economy.

So, while the central party has announced their stimulus package, which was heavy on infrastructure, the question then becomes (1) will the local governments build anything with the money they are given, or hoard the cash to weather the short term issues they are going to be facing and (2) are these investments going to bring returns, or will the investments simply result in a large number of wasted money that could have been put into programs that would have supported the populace long term.

For me, these are the concerns I have going forward because it is a cycle.  None of these events or actions are disconnected, much less decoupled, and with firms showing they are unwilling to invest in the Chinese economy unleveraged, my concern is that this increases the likelihood that we will see a large portion of the Chinese stimulus sit idle as a result.  Local governments are notorious for hoarding when they are uncertain, and I just cannot see how this will change until they are comfortable giving up what they may feel is their last lifeline.

Following this line, I have a post on consumers in process. I simply do not believe China’s consumers will be the consumers of last resort, and I think the economists who are pushing that line are simply trying to squeeze water from a rock.

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6 Responses to “Don’t Worry About China’s Exports. Worry About FDI”

  1. Worldwatcher says:

    December 10th, 2008 at 10:32 pm

    In a speech former US Ambassador to China, Amb Stapleton Roy thinks that China’s future is bright and US should learn to deal with it.

  2. Chris Devonshire-Ellis says:

    December 11th, 2008 at 1:38 am

    Rich, I’m not sure I’m buying this. At Dezan Shira & Associates we specialise in FDI. For sure we anticipated a slowdown in new investment, however Octobers figures were 27% up on same period 2007 and Novembers’ were up by 34%. It’s still too early to call December, but our teams of lawyers and accountants are busy and the investment pipeline – which we have evaluated extremely closely – looks strong and sustainable. We’ve experienced only a handful of project cancellations; and these only from smaller SME’s. I read so much comment about slowdowns and a decrease in investment, but we’re seeing the reverse. Conflicting signals I know, but this is how it looks from our side of the fence and we, as I said and you know – specialise in FDI. It still seems bouyant to us.

  3. Rich says:

    December 11th, 2008 at 2:23 am


    I guess the question is (and perhaps I should have looked at this deeper), is whether this is actual vs. contracted investment. The two are different.

    That being said, I had already set aside a list of statistics that I was planning to draw out this weekend. I really want to know what sectors fell off, and then present a more complete picture. There is clearly something going on behind the scenes that the initial reports do not fully address, and perhaps I would have better served readers by waiting a few days.


  4. Duncan says:

    December 11th, 2008 at 7:44 pm

    My take on FDI is that firms are, for the moment, not concerned about returns. Cash is king, and any that companies can lay their hands on is being hoarded not invested – in China or elsewhere. Looking ahead the credit queeze is clearly going to continue to have an impact on FDI. Also next year profitable companies in China may be encouraged to send more funds back home to help out the head office rather than reinvest for growth, so almost certainly we’ll see a slip from previous FDI peaks.
    It’s worth bearing in mind that the majority of investment in China comes via the offshore havens favoured by HK, local and Taiwanese investors. These are just the guys being worst hit by a number of factors at the moment, so the present slowdown may be related to that. Also, Chris, I’d be interested in whether you’re talking contracted or actually invested deals. It may be that some deals are being agreed but implementation postponed a few months while hoping for the financing situation to stabilise.

  5. Chris Devonshire-Ellis says:

    December 15th, 2008 at 1:29 am

    Rich we’re dealing with actual investment. The picture is fairly simple to analyse:
    1) Businesses in China that are exposed to shrinking export markets and are labor intensive are hurting, biz is drying up and increased labor costs are punishing them;
    2) New investment in this area, (export driven) is being stalled (however thats not our firms market, generally).
    3) Businesses that are involved with selling to China are fine, and China’s retail market is expanding at its fastest rate for 9 years. Our clients are mainly in this sector, some are expecting growth rates of 30-40% in 2009. See also:
    4) No-one in the supply chain industry has any idea. Why? They have no experience of a China downturn. Find out how many of them were here during the Asian Financial crisis, and I think you’ll find very few have any experience of assessing what is going on. But I can assure you, this “crisis” is not across the board and is affecting only certain parts of the economy.

  6. Rich says:

    December 16th, 2008 at 6:19 am


    Where the actual vs. contracted in important is (1) a huge cut in contracted capital is not in itself a huge issue short term. I have found that between 20-30% of contracted capital fails to convert anyway (2) 6-12 months down the line we may see a sever deep in the actual FDI as well – something you would see.

    … aside from this, where I see this number as possessing some worrying traits is that I think we will see previously contracted deals canceled, and other will see their leverage pulled.. as your article on China Briefing shows.

    with regard to the supply chain people, acutally I would disagree completely. My friends in express and forwarding were telling me of what they were seeing 9-12 months ago as signs that the economy was about to hit a wall. It was the banker, economists, politicians, and business development people who were caught on their back foot.

    depth of the issues I would also agree are largely contained on a sectoral basis, but I would hesitate to say that will not change quickly, and as my posts are beginning to show… there is a lot of crossover and crosscurrents that are beginning to come into play that I believe will create some very difficult dynamics going forward.