China still most attractive for FDI

China's attraction did not decline and it will attach more importance on selection of foreign investment in the future.

According to the data announced by the Ministry of Commerce of China a few days ago, China's volume of FDI (Foreign Direct Investment) was 8.4 billion U.S. dollars in April 2012, a drop of about 0.7 percent year-on-year. China's FDI has kept a negative growth for six consecutive months since November 2011.

Shen Danyang, spokesperson of the Ministry of Commerce of China, said that the situation that a large amount of foreign funds are withdrawn from China has not yet been found and it does not exclude the possibility of medium and long-term foreign funds being withdrawn.

An expert said in an interview with the People's Daily that the slowdown of funds introduction should not be misunderstood as the "fleeing of foreign investment," which are just exaggerated words from outside.

The real causes

Shen said that domestic and international factors together led to a sustained negative growth of attracting foreign investment in China.

"On one hand, the overall world economy is sluggish, which has greatly affected the global direct investment. The United States and the EU encourage the industries to return to their own countries and the developing countries increased preferential policies to attract foreign investment, which brought China more fierce competition," said Shen.

"On the other hand, from the domestic factors, the operational cost advantage of China has weakened since the rise of factor costs."

Bian Weihong, a senior analyst at the Institute of International Finance under the Bank of China, said that the debt crisis is sharply deteriorating and the euro zone also fell into a negative growth for two consecutive quarters, which also led to the acceleration of capital flowing out of the emerging market countries.

Besides the debt crisis of the EU, Chinese economy is in the stage of adjustment, which also led to slowdown of introducing foreign investment, said Bai Ming, vice director of the Department of International Market Research under the Chinese Academy of International Trade and Economic Cooperation.

Bai added that due to the downward trend of Chinese economy, the rise of labor costs and the climbing of prices of raw and semi-finished materials, foreign countries have reduced the willingness to invest in China.

Li Zhongzhou, former head of the Ministry of Foreign Trade and Economic Cooperation, said that the regulation and control of domestic real estate market is also a reason that cannot be ignored. The foreign investment in actual use in the real estate field has accounted for one-fourth of the total foreign investment in recent two years. Under the regulation and control, the introduction of foreign investment in the real estate field has dropped by 6.3 percent in the first quarter in 2012.

China still a favorite destination for foreign investors

The annual "Business Climate Survey" published by the American Chamber of Commerce in China shows that although the rise of various costs in 2011, 78 percent of U.S. companies still regard China as one of the three major investment regions.

According to the latest "Capital Confidence Barometer" released by Ernst and Yong, the world's well-known accounting firm, Chinese Mainland is still the most attractive investment region in the world, followed by India, the United States, Brazil and Indonesia.

"At the present stage, China's labor cost advantage still exists," said Bai. "Due to the rise of labor costs in China, some investments in lower labor costs began to turn to the markets of other countries and the middle and western China, which is the trend of future development."

Zhu Jianfang, chief economist of the CITIC Securities, said that the decline of FDI is short-term. The decline of FDI in manufacturing is the result of China's industrial structure adjustment and the decline of FDI in low-end manufacturing is in line with China's industrial restructuring policy. Currently, high-end manufacturing needs to absorb more foreign funds to develop.

Quality over quantity

Shen said that at present, China's utilization of foreign capital has paid more attention to optimize the structure and improve the quality, rather than the scale of foreign investment, which also have some impacts on the use of foreign funds.

Shen stressed that the overall investment environment in China is being improved. "We are neither optimistic nor pessimistic about the overall situation," said Shen.

Li Zhongzhou also has a cautious optimism on the use of foreign capital. He said that the FDI will not render a long-term downward trend and Chinese market still has strong attractions. However, Li advocates an internal demand-based export-oriented economy.