Despite rising labor costs, China's allure for foreign companies is increasing due to the growing market, high return on investment and government efforts to improve the business environment.

Top FDI choice

"We will continue to utilize foreign investment actively and efficiently, open up more service sectors to foreign capital, and level the playing field for domestic and foreign enterprises to compete on fair terms so as to ensure that China remains a top choice for foreign investment," Premier Li Keqiang said earlier this week in his government work report delivered to the nation's top legislature.

A combination of rising labor costs and a slowdown of economic growth from the past double-digit economic expansion rate seems to have created a perception that China has lost its allure for foreign companies. In fact, the truth is quite the opposite.

The Chinese mainland registered 127 billion U.S. dollars of foreign direct investment (FDI) inflows in 2013, closing the gap with the United States to about 32 billion dollars, according to the United Nations Conference on Trade and Development (UNCTAD).

Despite signs of recovery in some developed countries, FDI flows to the United States failed to reverse their decline, contrary to other signs of economic recovery over the past year. FDI flows to developed countries remained at a historically low share (39 percent) of total global FDI flows for the second consecutive year in 2013, the UNCTAD said earlier this year in a report.

Big market, high return

"Foreign investors are still very interested in China. In the past, many came because of low wages and the opportunity to export. Now investors are more interested in the domestic market," contended David Dollar, a senior fellow at Washington's Brookings Institution.

"Higher wages are good for stimulating domestic demand, so higher wages are not an impediment to the new kind of investment coming to China," Dollar told Xinhua.

Dollar's view is echoed by Ryan Rutkowski, a China Research Analyst with Washington's Peterson Institute for International Economics, who believes that it still makes sense that multinationals continue to invest in China.

"China is a leading global consumer of many goods and services with strong growth prospects. The middle class in China's wealthiest provinces are already major global consumers of goods and increasingly services, while many markets in the interior are only just beginning to catch up. Manufacturers in China can now count on selling more goods to the Chinese market whereas before they focused primarily on exporting to advanced economies," Rutkowski told Xinhua.

Foreign companies remain attracted to China because it still offers superior returns. The income generated by foreign enterprises in China is among the highest in the world. The returns generated by FDI stock in China averaged 9.4 percent between 2002 and 2012, compared with only 5.8 percent for investment in the United States, he said in a recent analysis article.

Better business environment

Moreover, foreign companies can now invest in more diverse businesses in China. In the past, the vast majority of investments were confined to the export manufacturing sector, but today manufacturing represents only two fifths of foreign investment inflow, while the service sector share is now over half of new FDI inflow.

The recent string of reforms -- the Shanghai pilot free trade zone (FTZ), experimenting with the "negative list" approach, opening up more service sectors and reducing government approval requirements -- has helped bolster investor confidence and improved the business environment.

Lured by better trade, investment and administrative rules, about 100 companies have registered in the FTZ every day since September, according to the FTZ managers.

Yang Xiong, mayor of Shanghai, said earlier this week that the "negative list" identifying bans or restrictions on foreign investment in the FTZ will be shorter in its 2014 incarnation.

Nationwide, newly registered businesses increased by 27.6 percent last year, and private investment was up to 63 percent of total investment.

"We are all sharing the fruits of fast economic growth," commented Bian Chenggang, General Manager of Intel Products (Chengdu) Ltd..

By the end of December 2013, 252 Fortune 500 companies had set up branches in Chengdu, capital of southwest China's Sichuan Province. Last year alone, an additional 22 Fortune 500 companies settled in the city.

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