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Is China losing glamour for foreign investment?

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China has been an ideal destination for foreign investment for decades. However, when foreign direct investment (FDI) into the country fell amid the global economic slowdown, some wonder if China is losing its glamour.

Latest statistics show the total FDI inflow for the first eight months this year dropped 3.4 percent to 74.99 billion U.S. dollars, which may fuel the worries, or even allegations against China's environment for foreign investment.

However, in east China's Anhui, an inland province which used to be less attractive to foreign investors, the picture is a bit different.

With a total investment of 280 million U.S. dollars, a joint venture wwas officially established in August by the Navistar International Corporation, a U.S.-based manufacturer of commercial vehicles, and its Chinese partner Anhui Jianghuai Automobile Co.(JAC).

The joint venture is expected to produce 150,000 diesel engines annually after it goes into operation. Troy Clarke, president of Navistar Truck & Engine, called the joint venture "a significant step in Navistar' s global growth."

Statistics from the Anhui Provincial Department of Commerce show the province attracted 5.36 billion U.S. dollars in foreign direct investment in the first seven months, up 25.5 percent year on year.

Even with an overall drop in national FDI inflow in the first eight months, investment from Germany, the Netherlands and France increased by 27.27 percent, 3.3 percent and 14.78 percent respectively.

Meanwhile, the FDI into the country's service industry, excluding the real estate sector, rose 5.31 percent year on year in the first eight months of 2012. Boosted by growing domestic consumption, foreign investment in the retail sector rose 9.76 percent.

WHY FDI DROPS

The main reason in the drop of FDI into China is that many overseas investors are facing difficulties in a sluggish global economy, said Mei Xinyu, a researcher at the International Trade and Economic Cooperation Institution under the Ministry of Commerce.

According to the 2012 World Investment Report issued by the United Nations Conference on Trade and Development in July, the growth speed of global FDI in 2012 will slow down to fluctuate around 1.6 trillion U.S. dollars. Statistics also show global trans-border acquisitions and Greenfield investment volume dropped in the first five months of this year.

The lingering debt crisis in Europe has caused a downturn in the EU's investment in China. From January to July this year, the EU's actual investment in the country totaled 3.97 billion U.S. dollars, down 2.7 percent year on year, according to the Ministry of Commerce.

Also, industries in China, especially the labor-intensive ones which used to absorb FDI, are facing market saturation, or their competitiveness has declined due to price hikes of raw material and other factors, Mei said.

With China's economic and social development, some foreign investors have gradually lost their competitive edge over their Chinese counterparts.

"I don't think it's justifiable for them to blame a 'deteriorating' business environment in China," Mei added.

Spokesman for Ministry of Commerce Shen Danyang also attributed the dwindling investment inflows on both international and domestic economic factors, including the eurozone's ongoing debt crisis, the U.S.' strategy of bringing manufacturing back home, China's strained land supplies and rising labor costs.

STILL IDEAL FOR INVESTORS

The year of 2005 witnessed a major change for FDI in China, when the country set higher standards on environmental protection and stricter requests on fair play.

In 2008, China began to levy the same rate of corporate income tax on domestic and foreign businesses. Before that, Chinese state-owned enterprises bore 30 percent of corporate income tax; Chinese private companies bore 22 percent; foreign businesses only had to pay 12 percent.

In the meantime, foreign capital's role in China's economic structure changed. Chinese factories used to be only the manufacturing or assembly base for foreign investors, but now the products are increasingly targeted at the Chinese market, directly competing with Chinese businesses, said Zhang Yansheng, a foreign trade expert with the National Development and Reform Commission,

Despite all this, China is still an ideal destination for investment, observers said.

China is politically more stable than most countries in the world, which is an essential factor to lure foreign investment, said Mei Xinyu.

China's macro-economy is also more stable than most others, which can be demonstrated in its economic performance in the years of the sub-prime crisis, particularly its resilience in the continuous economic repercussions surrounding emerging markets since last year. More and more investors will treat China as a haven for their capital, Mei said.

China also boasts other competitive advantages to lure foreign companies, including a large, educated, disciplined and diligent labor force, huge domestic market and quality infrastructure, among others.

China adopted the reform and opening-up policy in 1978, which eventually pushed the development of the country into the world's second largest economy in over three decades. There is no sign that China will change its reform and opening-up policy.

In an important speech prior to the 18th national congress of the Communist Party of China (CPC), which will elect a new central leadership, President Hu Jintao called on officials to "unswervingly" carry forward the reform and opening-up.

Hu said that all members of the Party must bear in mind that China's rapid development over the past 30-odd years hinged on reform and opening-up.

"Only through reform and opening-up can China be developed," he said, noting that is also true with socialism and Marxism.

China will always work to provide a sound investment environment for domestic and foreign businesses, because a major power like China can only gain prosperity and compete with other economies when goods and capital keeps flowing in from abroad, said Mei Xinyu.

"In this regard, we welcome criticism and will introspect if our jobs are not done perfectly," said Mei.

Zhang Aimin, an official in charge of foreign investment affairs in the Anhui Provincial Department of Commerce, said the province launched a "Double 100" campaign to woo investment this year.

The province is targeting 100 big companies in Japan, the United States, Europe, as well as Hong Kong and Taiwan to get investment from them. It is also strengthening ties with 100 chambers of commerce and trade associations, aiming to facilitate those who want to invest in Anhui.

Zhejiang Province, a more economically dynamic neighbor of Anhui, encourages foreign companies to invest in high-end manufacturing, high and new technology industries, modern service, new energy, and the industries of energy conservation and environmental protection.

All kinds of signs show the current drop in foreign investment in China is temporary, and most multinationals are still full of confidence in the Chinese market, said Shen Danyang.