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September 2004
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| MAGNIFYING GLASS |
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China, U.S. Investment Flows Reflect Growth Outlooks
The amount of money foreign investors are sinking into the United States is
shrinking, while the capital flow into China, with its cheaper labor and better
growth prospects, is growing, making sentiment about the U.S. economy and dollar
more bearish.
A report from the United Nations Conference on Trade and Development (UNCTAD)
released on Wednesday showed that China's booming economy attracted $54 billion
of foreign direct investment (FDI) in 2003, about the same as in 2002.
But amid uncertainty about the strength of the world's largest economy, FDI
flows to the United States fell by more than half to $29 billion, the same as
the investment in Belgium.
A net $43.6 billion in FDI flowed into China in the first eight months of 2004
and should exceed $60 billion this year, China's official news agency said on
Wednesday, citing a Commerce Ministry forecast.
Brian Garvey, senior strategist at State Street Bank in Boston, said foreign
demand for U.S. stocks in general remains "very weak" because investors are not
sure how the U.S. economy will fare next year and beyond.
The Federal Reserve started raising U.S. interest rates for the first time in
about four years this year, and the U.S. government's tax cuts have now been
implemented, meaning it is not clear where a further stimulus to U.S. economic
growth may come from.
So U.S. investors are looking abroad for opportunities, and these outflows are
easily eclipsing FDI inflows from abroad.
U.S. investment abroad totaled a net $65 billion in the United States in the
first half of 2004.
A large portion of the investments directed overseas is coming from U.S.
businesses, attracted by a cheap labor markets and myriad opportunities in
emerging markets.
For example, China's economy grew by 9.1 percent last year. Growth this year
will likely slow, but will still exceed China's official target of around 7
percent, analysts have said.
By contrast, the growth picture is more mixed in the United States, where gross
domestic product grew by an annual 2.8 percent in the second quarter, down from
4.5 percent in the first quarter. GDP is expected to grow around 3.5 percent for
the whole year.
"Recent data would suggest the trend is continuing," State Street's Garvey said.
Against a record and widening U.S. current account deficit, State Street
maintains an underweight dollar position, he added.
Michael Woolfolk, a senior currency analyst at the Bank of New York said that as
long as China "remains an attractive market for U.S. manufacturers, we're going
to see a continuation of this outflow," said
Many U.S. manufacturers and politicians have blamed China for the loss of U.S.
manufacturing jobs because China's foreign exchange regime is subject to strict
controls in which the yuan is closely pegged to the dollar at around 8.28 yuan
per dollar.
As the dollar has broadly weakened over the past three years, so the yuan has
fallen, thus maintaining the competitiveness of already-cheap Chinese goods on
global export markets.
China has said it is taking measures to ease capital controls that will
eventually lead to a more flexible currency regime. But it has also said it has
no intention of floating the yuan any time soon. Pressure to revalue, however,
is apt to mount as the economy grows quickly and global capital continues to
flow into China.
Source: Reuters
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