Chinese Foreign Direct Investment growth spikes; downtrend skewed by holidays

Chinese Inbound Foreign Direct Invesment 3_26_2013Enlarge GraphForeign direct investment (FDI) actually decreased in dollar value, despite news hype about year-over-year percentage increase.

FDI is a valuable metric to gauge investor confidence in a given country. It behaves in a similar way to fund flows relative to asset classes. When FDI increases, it can be taken as a sign of confidence by the international community on the economic prospects of the country.

FDI, as the name implies, includes direct investments, which is comprised of acquisitions, building of facilities or reinvestment of profits; it does not include investments made by purchasing of shares, so it excludes stock market investments.

During February, FDI to China reached $7.7bn, which is approximately 6% when compared to February of last year, though that a “glass half full” view. The “half empty” version is that FDI was 17% lower in February when compared to January of this year and almost 35% versus 2012…

It is important, though, to keep in mind that January and February comparisons for unadjusted data such as FDI result in skewed views given the Chinese New Year. In China, the Chinese New Year is followed by a week long holiday that skews data since many businesses pretty much shut down. The specific date varies every year since it is based on lunar phases.

In this case it would make sense that February was lower than January since the Chinese New Year fell in February, which would also mean that when compared to last year the jump is more impressive since the Chinese New Year fell in January. Because of this, February 2012 was unaffected though February 2013 was able to surpass it by 6%. Examining the origin of the FDI reveals that FDI from Europe actually increased 34% during January and February, reaching $1.2bn. On the other hand, the amount was more than offset by the fall in Japanese investment by $1.3bn, as a result of the territorial disputes between both nations. FDI from the U.S. and Asia decreased as well.

Chinese Inbound FDI Excluding Hong Kong 3_26_2013Enlarge Graph

Overall investors in Chinese equities (e.g. FXI, HAO, MCHI) should probably wait for the March FDI release before getting too polarized either for or against China. The Chinese New Year in February hints that perhaps the FDI should be interpreted more optimistically. Investors in emerging market focused ETFs (e.g. VWO, EEM) should also remember the relatively large weight China (~25%) and Asia in general (~50%) have in their holdings.