The debate about the real impact of foreign investment on China's economic development has been raging since the nation opened up more than two decades ago.

But it seems the argument could be close to subsiding as the annual foreign investment totals continue to rise, reported China Daily on Tuesday.

The foreign direct investment (FDI) to China is expected to reach US$60 billion in 2004 after it became the largest FDI recipient in the world last year by receiving US$53.5 billion.

By the end of October, China had received a total of US$555.3 billion in FDI.

Shen Jiru, a research fellow with the Chinese Academy of Social Sciences, says the swift increase in FDI will make China's economy too dependent on foreign trade which could decrease the country's ability to withstand global economic fluctuations and political instability.

It could also hinder China's ability to make independent economic decisions, Shen added.

An article by Shen, saying as much, was published in September. It formed part of the new round of debate on the role of foreign investment in China's economic development, as concerns swell with the increasing influx of FDI.

Shen claimed that the foreign dependency rates, referring to the volume of imports and exports in a nation's gross domestic product, stood at 14-20 per cent for the United States, Japan, India and Germany. But China's rate grew from 15 per cent in the early 1980s to more than 60 per cent last year.

And local people are used to hearing about the successful business stories of foreign-funded companies of how they defeated most of the major Chinese domestic companies and significantly increased their market shares.

Some analysts have even compared China to Latin American countries, which suffered from economic setbacks after large amounts of foreign investment were withdrawn as other locations with lower operating costs were opened up.

An official from the Ministry of Commerce refuted the claim, reflecting the government's view about the latest round of debate.

"China will not be a repeat of the Latin American story," said the senior unnamed official in a closed-door meeting recently.

The official said over the past 20 years, foreign-funded companies have contributed to China's emergence as a global economic power.

In 2003, foreign-funded companies contributed to one-third of the industrial output, 28 per cent of the industrial added value and 57 per cent of the nation's exports.

And foreign-funded companies also generated one-fifth of the total tax revenues, which are employing about one-tenth of the urban workers.

The official said the foreign investment was not excessive as it only accounted for 10 per cent of the country's fixed assets investment.

Besides the effects that can be precisely quantified, experts say foreign companies offer more in terms of competence, product quality and entrepreneurship.

Wang Zhile, an expert on multinationals from the Chinese Academy of International Trade and Economic Co-operation, said many foreign companies stood as examples of how to improve product quality.

They have also raised local consumers' expectations of indigenous products.

"Foreign direct investment has become a vehicle for upgrading quality standards throughout an industry, and more generally, throughout the host country through its demonstration effect," Wang said.

Moreover, their investments spur on domestic competition, thereby transmitting globally competitive practices to local economies, he said.

The foreign investment also brings world-class management techniques to China.

The transfer of managerial know-how has the potential to transform China's economic landscape by introducing market-based concepts to workers and managers in all walks of life, from State-owned enterprises to private entrepreneurs, Wang said.

He says he believes foreign investment in China is different from what happened in Latin America.

"Maybe the foreign investors viewed China as a manufacturing base when they entered, but they are changing their views from being a world factory to becoming a world market," Wang said.

In addition to using their investments to produce exports, they will realize that China is actually emerging as a large consumer.

Proof in the changing of views comes from the fact that foreign companies are setting up research and development centres and service departments especially for the local market, Wang said.

Opinions expressed by foreign business chambers also confirmed China's position in their global strategies.

An American Business in China White Paper by the American Chamber of Commerce in China and AmCham Shanghai, which was published in September, said it is clear that US-based companies place very high priorities on their investment programmes in China, and that US investment is primarily targeted at the domestic Chinese market.

Only one in six member companies invests primarily to produce goods or services in China for the US market. Only 10 per cent of them said they were investing in China primarily to shift their manufacturing to lower costs, the paper said.

These figures challenge the assumption that US companies are rushing to move capacity to China primarily to lower costs and to compete more effectively at home.

In fact, US companies are gearing their investment programmes in China primarily to the Chinese market, Wang said.

And a similar report from the European Union Chamber of Commerce in China also concluded that the top reason for being in China was to produce goods for the Chinese market.

Wang said although China ranks first in the world in using foreign capital, it does not exceed other developing countries in this area when considering its huge population.

The official from the Ministry of Commerce said: "Actually, China is still facing a fierce war to court foreign investment as many countries such as India, South Korea and Viet Nam have offered more preferential policies for foreign investment."

However, some analysts say China should stop its favorable foreign investment policies and erect a comprehensive framework to govern foreign investment over the long term.

Zhang Fan, a professor from the China Centre for Economic Research at Peking University, said it was indisputable that the country had enjoyed unprecedented prosperity due to in part by foreign investment.

But the issue of the role of foreign investment in China's economy will persist as investment continues to pour in, he said.

The disadvantages of multinationals' activities usually include the government losing some structural autonomy, the economy becoming more vulnerable to the international market, and income distribution within and between industries changing.

"My suggestion is that the foreign investors should be treated the same way as the domestic firms in the long run, as part of a competitive market economy," Zhang said.

It is imperative for China to create an open and fair environment for all firms, domestic and foreign alike, in order to cultivate the growth of its own multinationals.

"And the most important thing in attracting foreign investment is not special treatment, but a stable, standardized investment environment," Zhang said.

As China strives to build up a rule-based market economy that respects policy transparency, protects intellectual property rights and upholds fair competition, China will be better able to attract FDI, he said.

"The Chinese Government has no comprehensive policy in regards to foreign investment. It needs to formalize such a policy," Zhang said.