Foreign Direct Investment in China Jumps 45.6 Percent

By Li Yanping and Nipa Piboontanasawat

July 11 (Bloomberg) -- Foreign direct investment in China rose 45.6 percent in the first half from a year earlier, swelling inflows of cash that may stoke inflation in the world's fastest-growing major economy.

Spending by overseas companies increased to $52.4 billion, the Ministry of Commerce said today on its Web site.

China is adding controls to try to stem inflows of speculative capital from investors attracted by a strengthening yuan and interest rates at a decade high. So-called hot money inflows may have reached more than $200 billion in the first five months of this year, according to Michael Pettis, a finance professor at Peking University.

``Foreign direct investment has been one of the major channels for hot money since the beginning of 2007,'' said Shi Lei, an analyst at Bank of China Ltd. in Beijing. ``Speculators can always find a way to circumvent government rules.''

Besides the risk of stoking inflation that reached a 12- year high in February, hot money puts the nation at risk of ``massive outflows'' if expectations for currency gains reverse, according to a central bank report last month.

The yuan has gained 6.9 percent versus the dollar this year and 21 percent since a fixed exchange rate was scrapped in 2005. The key one-year lending rate is 7.47 percent, and the deposit rate is 4.14 percent.

Trade Surplus

The cash from foreign direct investment adds to the $21.4 billion pumped into the economy last month by the trade surplus.

China's foreign-exchange reserves, the world's largest, surged 40 percent to a record $1.68 trillion in March from a year earlier, according to the latest official data. The increase through June may be announced as early as today.

``As long as the yuan continues to appreciate and the economy outperforms other countries, China will remain an attractive destination for funds,'' said Zhu Baoliang, chief economist at State Information Center in Beijing, an affiliate of China's top economic planning agency.

The government is adding measures to try to stop investors from circumventing capital controls.

The State Administration of Foreign Exchange said last week that it will inspect exporters' foreign-exchange settlements from July 14 to try to prevent sham transactions that let hot money in.

China is also drafting regulations to control cross-border payments for services, with the same aim, according to an official at the regulator, who wouldn't be identified.

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net