18 Jan 2018 16:29 IST

China's rebound misses serious foreign money

Foreigners have delivered support through roaring demand for exports

The economic recovery in 2017 is feeding complacency among Chinese officials. Yet while overseas money pours into stocks and bonds, this cash doesn’t boost efficiency the way long-term foreign direct investment does — and China remains highly inefficient.

Full-year GDP data on Thursday is likely to show growth quickening for the first time in seven years to 6.9 per cent, based on recent comments from Prime Minister Li Keqiang. Analysts expect a slight fourth-quarter dip to 6.7 per cent.

Foreigners have delivered support through roaring demand for exports, and buying Chinese securities. But FDI, once a major reform driver, has lost economic force.

Official FDI data is unreliable, and includes large inflows from Hong Kong, which is part of China. Monthly flows slid for most of 2017, before a statistically convenient $19 billion spike in November put the figure back into the black. A few huge acquisitions worth could have done it, but those tend to be publicised. Eikon data shows only $2.3 billion of deals completed by non-Hong Kong foreign firms for the whole year.

Economists also think the figures capture too much investment by Chinese firms disguised as offshore entities, sometimes on instruction from local officials. Attracting international capital to pet projects validates the schemes’ attractiveness, and serves as a bureaucratic performance metric.

Meanwhile, foreign investment in fixed assets such as machinery, buildings and software has cooled since 2013; surveys by foreign chambers of commerce reflect intense pessimism; and lawyers scratch their heads when asked about big inbound buys.

That is likely to hurt productivity. Studies suggest foreign-invested firms generate an outsized proportion of output and net profit, and use capital more efficiently than credit-addicted domestic peers.

Beijing continues to make small moves to attract foreign investment into strategic sectors. But the Made in China 2025 programme explicitly plans to replace international products with domestic brands. Costs have risen, laws are onerous, and the Communist Party is inserting itself into boardrooms.

China may regret overseas executives’ loss of enthusiasm. As US President Donald Trump prepares a raft of aggressive anti-China measures, the American corporate lobby, once reliably pro-engagement, seems benumbed. And almost nothing is less efficient than a trade war.

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