Foreign direct investment in China slumped 35.7 percent in July from a year earlier to US$5.36 billion, the sharpest reduction in growth in nine months, the Ministry of Commerce said yesterday.

Though the falloff was significantly higher than in June - and the tenth monthly drop, some analysts cautioned about reading too much bad news into the figure. The reduction might be a limited phenomenon caused by foreign investors puzzled by the uncertainties clouding the global economy, they said.

"FDI figures are usually volatile because a big project can instantly change the face of the growth. But it was still quite unexpected for July's FDI to post such a deep drop," said Li Maoyu, an analyst at Changjiang Securities Co.

China's FDI growth in June fell 6.8 percent to US$8.96 billion. It decreased 17.8 percent to US$6.37 billion in May and 22.5 percent in April to US$5.89 billion.

"It seems the improvement evidenced over the past few months has not established a solid trend. Also, the high base last year partly contributed to the deep fall," Li said.

In July last year, FDI reached US$6.07 billion, up 44.5 percent on an annual basis and adding to growing concern over an inflow of hot money, or speculative investment, from overseas.

"The financial crisis has almost paralyzed the mobility of hot money," said Tang Yonggang, an analyst at Hongyuan Securities Co. "The absence of speculative investment makes the FDI figure look rather dismal.

"But the fundamental reason for the falling FDI is that foreign investors are still being prudent about their spending with the global economy failing to show signs of a stable recovery."

Sherman Chan, an economist at Moody's Economy.com, agreed China was yet to see a major return of foreign investors.

"Although a tenth straight year-on-year decline was expected, the deeper fall serves as a wake-up call to the optimists," Chan said.

"The authorities should still address the downbeat FDI performance. Although foreign investors may be holding back because of limited funding or general risk aversion, both of which are not directly within the Chinese government's control, policy makers should still ensure the appeal of investment opportunities on the mainland."

She urged the government to secure the growth potential in the consumer market, which should be attractive to retailers from overseas. In addition, China's bid to improve environmental protection and expand renewable energy use should create opportunities for foreign specialists.

"The Chinese government needs to strengthen foreign investors' confidence in the business environment on the mainland and facilitate FDI growth, which benefits the developing powerhouse in various forms such as technology transfer," Chan said.

Things could be a lot worse, indicated Commerce Ministry spokesman Yao Jian. He told a news conference in Beijing that China's FDI was still healthy compared with the global slump in investments.

(Shanghai Daily August 18, 2009)