China 2010 Foreign Investment Rises to $106 bn to Record

· Samsung and LG to Build LCD Factories in China

· High Labour Costs Push Textiles and Toys Down

Foreign direct investment in China rose to a record $105.7 billion last year, underscoring confidence that rising incomes will boost demand in the world’s fastest-growing major economy.

Investment climbed 17.4 percent from a year earlier, the Ministry of Commerce said in a statement in Beijing on 17 January. Spending in December rose 15.6 percent from a year earlier to $14 billion.

Boosting wages and reducing income inequality will be major tasks over the next five years, China’s leaders said in October after setting targets for the economy for the 12th five-year plan. Samsung Electronics Co. and LG Display Co., the world’s two biggest makers of liquid-crystal displays, received Chinese govern-ment approval to build LCD factories in the country and meet surging demand.

“Foreign companies tapping Chinese consumers will benefit from rising wages and will continue to invest in China,” said Alan Liao, an economist at Chinatrust Commercial Bank in Taipei. “There’s a misconception that higher salaries will force companies out of China, this may apply to low-margin textiles or toy manufacturers, but it’s not true for value-added service sectors and high-margin technology companies,” he said.

Overtaking U.S.

China in 2009 overtook the U.S. to become the world’s biggest car market, passed Germany as the largest exporter and likely surpassed Japan to become the second-biggest economy in 2010. It may overtake the U.S. as the largest economy by 2027, according to Goldman Sachs Group Inc. chief economist Jim O’Neill.

The economy probably expanded about 10 percent, Vice Premier Li Keqiang said last week. Growth may slow to 8.7 percent this year as the government tries to limit increases in asset prices, the World Bank said in a Jan. 12 report.

Foreign investment inflows are adding to liquidity flooding the economy from the trade surplus and surging bank lending and putting pressure on the central bank’s policy of restraining yuan appreciation.

The People’s Bank of China has raised interest rates and told banks to keep more money as reserves to mop up cash. The government is also encouraging outbound investment, allowing companies to keep foreign-currency earnings overseas and boosting use of the yuan for trade and investment.

Mergers Jump

Outbound investment by non-financial companies climbed 36.3 percent to $59 billion, the commerce ministry said. Overseas mergers and acquisitions by Chinese companies rose more than 30 percent last year to a record 188 with a combined deal value of $38 billion, PricewaterhouseCoopers LLP said at a press briefing on 16 January.

Middle-income and affluent consumers with annual household incomes of more than 60,000 yuan ($9,000) will probably almost triple in the next 10 years to 415 million, Boston Consulting Group Inc. said in a report released on Nov. 8.

There will be “strong” increases in salaries in the five years to 2015 as the nation’s supply of labor dwindles and consumers spend more and save less, Credit Suisse Group AG sad in a report dated Jan. 1. Wages may rise by 19 percent a year and private consumption may climb to 41.7 percent of GDP in 2015 from 35.6 percent last year, the bank estimated.

Companies in the online shopping and financial industries will benefit most from the increase in wages and consumer spending during the period, analysts led by Vincent Chan and Peggy Chan wrote in the report.

Billion-Dollar Factories

Wal-Mart Stores Inc. and a group partners last month agreed to invest more than $500 million in Chinese online retailer 360buy Jingdong Mall.

China became the largest LCD-TV market in the third quarter, surpassing the U.S., according to Soh Hyun Cheol, an analyst at Shinhan Investment Corp. in Seoul. Samsung and LG are planning to build multi billion-dollar factories in Suzhou and Guangzhou to meet Chinese demand for flat panel displays used in televisions and computers.

Taiwan’s AU Optronics Corp. last month said its board approved an additional $167 million investment in its plant in Kunshan, eastern Jiangsu province, that makes color filters used in LCD TVs and flat-screen monitors. The company is awaiting approval to build a $3 billion LCD plant in Suzhou.

Top Target

The United Nations’ trade and development agency predicted global foreign direct investment flows would climb to $1.5 trillion this year and $2 trillion in 2012 from an estimated $1.2 trillion in 2010, with China remaining the top target. India and Brazil will trail as the No. 2 and No. 3 recipients, according to the report.

China was the second-largest recipient of FDI in 2009, attracting $95 billion, behind the U.S. with $130 billion, the United Nations said in a report in July. China estimated its FDI in 2009 at $90 billion.