China’s foreign direct investment falls to 2-1/2 year low in August

(Reuters) – China’s foreign direct investment fell to a low not seen in at least 2-1/2 years in August, underscoring the challenges to growth facing the world’s second-biggest economy.

The weak investment data came as China’s economic growth appears to be hitting a soft patch after a bounce in June, with indicators ranging from imports to industrial output and investment all pointing to sluggish activity.

China attracted $7.2 billion in foreign direct investment in August, the Commerce Ministry said on Tuesday, down 14 percent from a year earlier and at a level not seen since at least February 2012.

That left China with $78.3 billion of FDI in the first eight months of 2014, down 1.8 percent from a year earlier.

“It reflects the downward pressure on the manufacturing sector,” said Zhou Hao, an ANZ economist. “The manufacturing sector has not been doing well so it’s logical that companies are reducing their investment.”

FDI is an important gauge of the health of the external economy, to which China’s vast factory sector is oriented, but it is a small contributor to overall capital flows compared with exports, which were worth about $2 trillion in 2013.

China startled global investors last weekend when it released data that showed factory output growing at its slackest pace in six years in August, stoking fears its economy was sliding deeper into a bruising downturn and causing some economists to trim their 2014 growth forecasts.

And even though data suggests that sluggish domestic demand is now a bigger drag on China’s economy compared with buoyant exports, Shen Danyang, spokesman at the commerce ministry, said the trade sector too is vulnerable to a cooldown.

“We are not sure foreign trade can certainly sustain the high growth rate seen recently in coming months because there are still a lot of uncertain factors in external and domestic markets,” Shen told reporters at a monthly media briefing.

Helped by a firmer U.S. economy, China’s exports have picked up recently to be a rare source of cheer in an otherwise gloomy data landscape.