2013-01-17 (China Daily) -- Foreign direct investment fell by almost 4 percent in 2012, the first annual decrease in nine years, although central provinces attracted increasing investment.
While FDI in the world's second-largest economy is expected to recover in 2013, the outlook for inbound foreign investment is not promising, experts said.
The Ministry of Commerce said on Wednesday that FDI fell in 2012 by 3.7 percent from a year earlier to $111.7 billion on the back of the global slowdown and Europe's debt crisis.
In 2011, FDI in China hit a record high of $116 billion.
Despite the general decline, central areas saw a net increase in FDI of 18.5 percent from 2012, but this only accounts for 8.3 percent of the national total.
Investment inflow from the European Union declined by 3.8 percent while FDI from the US rose by 4.5 percent, and from Japan by 16.3 percent.
There was a noticeable decrease in the FDI in manufacturing industries, said the ministry's spokesman Shen Danyang.
But Shen hastened to add that the top trade authority has not seen massive relocation of foreign businesses from China.
Manufacturing has been a major driver of China's FDI. As labor costs increasingly rose during the last year, some foreign companies in labor-intensive industries turned their focus toward cheaper emerging economies.
Last year, China's manufacturing sector reported a 6.2 percent year-on-year decrease in FDI.
Besides rising labor costs, Wang Zhile, president of Beijing New Century Academy on Transnational Corps, also attributed the drop to the fragile global economy and fiercer competition in attracting the foreign capital.
"The FDI drop is not unexpected amid European debt problems. China's performance last year was good," Wang said.
By the end of the third quarter of last year, China's economy had slowed for seven straight quarters.
The government is expected to release its 2012 economic results on Friday and the economy is expected to have grown at the slowest annual pace in the past decade.
During the first half of last year, China passed the United States as the world's largest FDI destination.
As central areas saw an FDI increase, the key eastern areas, which account for more than 82 percent of China's total FDI, saw a decline of 4.2 percent.
Western frontier regions saw a decline of 14.3 percent.
In July, the State Council, released a directive on promoting the development of central provinces.
One highlight of the directive is to foster the labor-abundant region's manufacturing sector by shifting business from traditional manufacturing bases in coastal areas.
The directive has encouraged local governments to map out ambitious plans.
Changsha, capital of Hunan province, announced in July a $130 billion investment package including airport expansion and road building. The sum represents 1.5 times the city's GDP in 2011. Wuhan, capital of Hubei province, saw $2.32 billion in FDI last year.
In December, China's FDI dropped by 4.5 percent, following a drop of 5.4 percent in November.
Shen said China expects to stabilize and improve the quality of FDI in 2013.
But he didn't comment on when the ministry expects the FDI to turn around. He just said many international companies remain upbeat about China investment.
"Generally speaking, China's FDI in 2013 will rebound from 2012, thanks to China's commitment to reform," said Wang, from the academy. But "China needs to continuously improve the business climate for foreign companies," he said.
Commerce Minister Chen Deming said on Monday that China will continue to optimize the foreign investment environment, including protection of the intellectual property rights and software legalization.