Business

Foreign investment in China slows on tightening policy

Chinese supermarket
Image caption Foreign companies and investors have been to get a share of China's fast-growing market

Foreign direct investment (FDI) in to China has slowed as the government steps up its efforts to rein in the country's economic growth rate.

In June, foreign investment grew just 2.8% to $12.86bn (£7.9bn) compared to a year earlier, down from May's 13.4%.

However, during the first six months of the year China attracted investments worth $60.9bn, up 18.4% on a year ago.

On Wednesday, China said its economy grew by 9.5% in the second quarter.

China's rapid expansion in recent years has seen it become the world's second-largest economy and one of the top destinations for foreign investors.

Last year foreign investors pumped $105.7bn in to the Chinese economy in an attempt to get a share of the fast-growing economy.

Asset bubbles?

However, China's expansion has been powered by a credit boom in the country.

Chinese banks lent out record sums of money in the past two years to ensure that the country's high growth rate was maintained during the global financial crisis.

That has led to concerns that the current path of growth may not be sustainable and may have created asset bubbles, where some investments like property are overvalued.

"There are concerns about potential asset bubbles being formed in the Chinese property sector," said Rajiv Biswas of IHS Global Insight.

Mr Biswas added that while the introduction of measures by the government to curb lending had been good, investors were worried about their impact on growth.

"Tighter credit conditions in 2011 have made the property sector vulnerable to a correction, particularly for high-end properties in China's largest cities," he said.

At the same time, authorities have also had to tackle rising consumer prices that have been driven up by a surge in food and fuel costs.

That has seen the country's central bank raise interest rates three times this year.

Mr Biswas said that accelerating inflation coupled with higher cost of borrowing had investors worried whether China would be able to maintain its growth rate.

"A key lever of tighter monetary policy has been restrictive measures on lending by banks, which has significantly tightened credit conditions and corporate liquidity for Chinese firms, which has also impacted on investment decisions," Mr Biswas said.

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