Realized foreign direct investment (FDI) to China dropped about 2 per cent year-on-year in the first 11 months this year while contracted foreign investment grew about a quarter over the previous year.

China realized US$53.1 billion of FDI from January to November, 1.9 per cent down from 2004, according to the latest statistics published yesterday by China's Ministry of Commerce.

Contracted foreign investment to China, which indicates the future investment flow, grew to US$167.2 billion from January to November, reflecting an increase of some 23.99 per cent.

During this period, the ministry said, the Chinese Government approved 39,679 new foreign-invested ventures, up 1.17 per cent year-on-year.

Statistics from November alone are unavailable. Based on the calculation of published statistics, monthly-realized FDI grew 24 per cent year-on-year to US$4.7 billion while contracted investment rose nearly 39 per cent to US$22.2 billion.

Meanwhile, the ministry said that Hong Kong ranked first among all investment sources in the first 11 months followed by the British Virgin Islands and Japan.

The past 11 months have witnessed both a slow growing and declining FDI to China, a sharp contrast to the 13.3 per cent annual growth achieved last year.

However, experts said that this does not mark foreign investors' withdrawal from China.

"I would like to attribute macro-control policies as well as the overall macro economic situation to the slide (in FDI)," said Liu Manping, a researcher with the National Development and Reform Commission.

He said the decline was in line with the nation's policies to cool down some over-heated industries and was also in line with the decline in domestic investment on fixed assets.

In addition, the expert said that FDI to China last year was too large for the country to achieve fast growth again this year.

According to a report published by the United Nations Conference on Trade and Development, China ranked second among investment destinations in 2004, only after the United States, which received US$96 billion in foreign direct investment.

"I regard the decline as a rational phenomenon, " Liu said. "And we cannot say that long-term foreign investment is withdrawing from China."

He said the withdrawal of capital has only been seen in some specific industries, such as the heavy chemical industry.

However, more foreign investors are seeking long-term ventures in China as part of their growth strategies.

Many foreign companies, in particular multinational ones, are moving research and development (R&D) centres to the country rather than solely using China as a "manufacturing base."

The UN's trade and development report said that there had been over 700 foreign research and development labs built in China since 1993 when Motorola constructed their R&D centre.

Liu said that China should diversify its strategies in order to encourage and maintain the flow of investment.

He proposed that local governments should prioritize the quality of foreign investment as opposed to focusing only on the value of the investment.

They should encourage capital injections into high-technology industries in order to help upgrade the industrial structure of a region.

However,"on the other hand, they should discourage high energy consuming and polluting projects," he said.

Source: China Daily