China Offers More Carrots to Entice Anemic Inflows.

Monday, July 6, 2009 9:08
Posted in category Invest in China
Comments Off on China Offers More Carrots to Entice Anemic Inflows.

Early on in the economic crisis, my primary concern was not that trade would fall off, which it did, but that foreign investment would fall off, which is has continued to do. Why I was initially fixate on this data point, rather than on the more popular trade figures, was simply the implied duration of the ripple effects that were sure to follow.

As I wrote in the  previous post Don’t Worry About China’s Exports. Worry About FDI:

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

The Impacts:
1) As the manufacturing sectors come off, the economic reverberations will run deep into the population.
2) With the manufacturing sector coming off, a lot of cities are going to tighten their infrastructural investment.

Which will lead to the questions then turning into:

  • 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
  • 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

Still following a negative trajectory, the Shanghai Daily article ‘Unprecedented difficulties’ for FDI highlights the severity of the fall:

The volume of FDI in China dropped 17.8 percent from a year earlier in May to US$6.4 billion with declines posted for eight consecutive months although the contraction momentum has softened from the decrease of 22.5 percent in April. “The declines, which stretched for eight straight months, have become the worst scenario since the Asian financial crisis,” said Chen.

For cities like Shanghai and Beijing who were seeing falloffs as firms looked inland, the drop has not been as traumatic as for those ciites that were still in their hypergrowth phase (Chengdu, Kunming, Changsha, etc) or those who were dependent on the overflow business from those hubs, and with the full effects beginning to be felt (college graduates failing to find jobs in foreign sector, tax bases eroding, etc), the government is no set to offer ANOTHER round of carrots (as reported in the China Stakes article China to Put Forth New Policies to Boost Long Sagging FDI)

Taxes from foreign-invested companies generally account for around 21% of China’s total tax revenue, and their exports and imports account for 55.3% and 54.7%, respectively, of China’s total. About 15 million people are directly employed by foreign-invested companies. The constant decline in FDI and the consequent decline of those numbers are forcing policy makers to pay attention and formulate policies to try to bring them back up.

Options possibly on the table include not only the access to domestic market IPOs, but also rolling back some of the various incentives that were once the bread and butter of many foreign investment zones. Policies that many zones felt restricted their ability to attract investment. From a policy perspective, these all make sense, but just as with the VAT rebate increases, my belief is that these “improvements” in plicy will fail to attract any real measure of improvement.

That, even though the lipstick makes teh pig more attractive, there is still no market for the port.

That without banks trusting banks, and firms able to access the various financing options that once made so many business appear viable, few are going to risk investing into China.

That, regardless of whether or not an expansion in China makes sense (reference GM sales in China), the fact that many firms who have yet to enter China (or build up the cash reserves for their China expansion) will be unable to financially afford to take advantage of these policies.

That, as long as China’s domestic market remains immature, and home markets flounder, it will be impossible to find a firm (assuming any are stable enough) to underwrite an IPO, or provide the scratch for a new factory.

That being said, were I a firm that had a business reason to expand, but just could not secure the loan, I would be on the ready for when the clouds break. China will keep these incentives in place until the bubble has enough air in it to get off the ground. For those firms who have prepared their documents, and have timed it right, there will still be an opportunitiy there.

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