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Moody’s Economy.com reports that China’s foreign direct investment inflows during August has increased, reflecting improving market confidence and an easing financial squeeze on firms.

Sherman Chan, economist at Moody’s, says that while the 7% year-on-year rise was insufficient to move the year-to-date figure back to positive territory,  it has nonetheless narrowed the decline from 20.4% y/y recorded in July to 17.5% in August.

“As businesses regain appetite for investment opportunities in emerging markets, and concerns on corporate capital and liquidity are receding, China will see a return of foreign funds in the near term,” says Chan. Chan adds that, compared with other emerging economies, China has a particularly strong appeal to investors because of its huge domestic market and proven resilience to external shocks. She also says that government policies have helped attract and facilitate FDI inflows.

Despite the encouraging results, Chan says it is too early to conclude that the recovery in FDI is solid. She says that the rise in August could be only a mild rebound after a massive plunge in July. Chan explains that with real estate data still showing weak foreign support, the recent pickup in FDI was primarily due to investment on manufacturing. “Many multinational firms have become more cost-conscious and may favour cheaper bases such as Cambodia. Hence, there are still considerable downside risks to China’s FDI outlook,” warns Chan.

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