FDI inflow falls as economy cools

Foreign direct investment (FDI) into the Chinese mainland edged down 1.47 percent in March, the first drop in over a year, reflecting challenges for overseas investors in an increasingly sophisticated environment.

China drew $12.24 billion in FDI last month, and the volume for the first quarter of 2014 came in at $31.55 billion, an increase of 5.5 percent from a year earlier, the Ministry of Commerce (MOC) said on Thursday.

MOC spokesman Shen Danyang said the March drop was normal, attributing the fluctuation to changes in individual investment projects and macro economic policies such as the recent yuan volatility.

"The fluctuation won't affect the steady growth of foreign investments for the whole year," while China will remain a very important investment destination for global investors, Shen said.

Around 55.13 percent of the FDI went into the country's service sector, and that to the manufacturing sector dropped 11.7 percent to 11.64 billion U.S. dollars, accounting for 36.88 percent of the total.

In the first quarter, FDI from major Asian economies saw steady growth, including a 7.84-percent rise from ASEAN nations and a 162.13-percent surge from the Republic of Korea.

However, investment from Japan shed 47.18 percent, while that form the United States and the European Union fell 1.91 percent and 24.52 percent, respectively.

China's outbound direct investment by non-financial firms dropped 16.5 percent to 19.9 billion U.S. dollars in the first quarter, the ministry said.

The data came as foreign investors are facing an increasingly tricky landscape in China, with the country's growth slowing and production costs rising because of a shrinking labor force.

Official data showed on Wednesday that China's growth slowed to 7.4 percent in the first three months, the lowest pace since the third quarter of 2012.

Beneath the headline number are China's painful efforts to gradually shift away from export-driven growth, which brought pressure to bear on foreign manufacturing businesses that once rode on China's cheap labor and land.

"China's trade and foreign investment data showed China's economy is undergoing a transformation as the era characterized by a lack of foreign exchange, capital and commodities is over," said Zhang Yansheng, secretary-general of the academic committee at the National Development and Reform Commission.

Both foreign and domestic investors need to adapt to the changes, Zhang noted, adding foreign capital may need at least five years to readjust.

"But those who focus on the real economy will remain bullish on the Chinese market in the long term," he said.

Along with China's economic restructuring, its demographic change is also challenging businesses in China.

The country's shrinking working age group is pushing up production costs and young Chinese, demanding better pay, are fuelling frequent strikes at factories, including foreign ones. This dynamic has made investment in China less effortless than before.

In a latest case, hundreds of workers at a manufacturing subsidiary of IBM in south China's Guangdong Province last month protested against a compensation package which they claim is unsatisfactory and determined without negotiation.

The protest, which lasted for over a week, was one of a string of such strikes at foreign factories.

Jiang Yuechun, an analyst with the China Institute of International Studies, said the rising labor costs and economic restructuring may lead to the exit of some foreign capital that relied heavily on the cheap labor and raw materials, but those that eyed high-end products and industries will remain competitive.

In the future, China will see more market-driven foreign capital rather than cost-driven businesses, Jiang said.