Foreign direct investment surged 33 percent in March from a year earlier as rising inflation and interest rates failed to damp overseas confidence in the world’s fastest-growing major economy.

Foreign investments added $12.5 billion to China’s economy, the Ministry of Commerce said in a statement in Beijing Tuesday. Investments increased at an annual rate of 29 percent in the first quarter.

China’s central bank said April 17 it would ratchet up lenders’ reserve requirements for the fourth time this year, aiming to prevent excess cash from fueling inflation that accelerated to the fastest pace in almost three years in March. Wal-Mart Stores Inc. said last month it may buy more land to build shops in the world’s most populous nation, which it predicts will be the largest grocery market by 2014.

“China outpaces the growth of other major economies in the world, consequently, the investment flows are continuing,” said David Cohen, a Singapore-based economist at Action Economics who formerly worked for the U.S. Federal Reserve. “The PBOC will need to raise reserve requirement further during the upcoming months to absorb the inflows, so that it doesn’t trigger a surge in inflation.”

Cohen expects China to raise the banks’ reserve requirement ratios by 50 basis points by June, and another two to three times in the second half this year.

The latest increase in reserve ratios will take effect on April 21, pushing the requirement to a record 20.5 percent for the biggest lenders.

China increased interest rates four times since October, to curb inflation that accelerated to a 5.4 percent annual pace in March. Liquidity remains “excessive,” Governor Zhou Xiaochuan said in Beijing last night, a day after the People’s Bank of China announced the fourth increase in lenders’ reserve ratios this year.

The investment surge will lead to “more political pressure for Beijing to continue to allow the appreciation of the yuan,” Cohen said.

Gradual appreciation of the yuan’s nominal exchange rate against the U.S. dollar will help the country overcome inflation, PBOC Deputy Governor Yi Gang said April 15. Former Chinese central bank adviser Yu Yongding said this month that China should allow its currency to strengthen against the dollar to keep a lid on consumer prices.

The fastest-growing major economy is attracting money from investors betting on the strength of its expansion and prospects for gains in the yuan. China’s foreign-exchange reserves jumped to a world-record $3 trillion in March, a level that exceeds the nation’s needs, Zhou said after a speech at Tsinghua University in Beijing last night.

Gross domestic product expanded 9.7 percent in the first quarter from a year earlier, exceeding economists’ estimate of 9.4 percent, supporting the case for more monetary tightening.

“China is not yet done with tightening,” Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, said before today’s release. “Inflation is likely to accelerate further before a cool-down begins,” he said, predicting a half percentage point of reserve-ratio increases in coming months and a quarter-point boost to benchmark interest rates.

Starbucks Corp., the world’s largest coffee-shop operator, said it aims to increase their presence in China by boosting the number of outlets in China to 1,500 by 2015. 

(Bloomberg)