Last week, China’s Ministry of Commerce (MOFCOM) reported that foreign direct investment inflows slowed to $78 billion in the first eight months of this year compared with $80 billion in the same period last year as inflows in August fell to their lowest level in four years. The decline has created the perception that foreign investors are now turning away from China.
However the focus on headline FDI inflows can be misleading. Although foreign investment inflows into manufacturing are slowing, inflows into China’s service sector remain strong. As a follow-up to last weeks' chart about the new the role of services in driving output growth, services are also now playing a dominant role in investment. Shown here in the chart below the share of foreign investment flowing into services exceeded manufacturing for the first time in 2010, and today account for three-fifths of all FDI flows. This underlying strength is now buffering foreign investment against a slowdown in manufacturing investment – the latter in part driven by the weakness in global trade. In the first seven months of this year, foreign investment inflows into services grew by $4 billion compared with the same period last year, almost completely offsetting the $4.2 billion decline in manufacturing inflows relative to last year. At this pace, foreign investment inflows into the service sector could reach $73 billion by the end of the year, 10 percent higher than last year and almost double inflows into the manufacturing sector.