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Foreign direct investment (FDI) to China in the first month rose nearly 11 percent from a year earlier, the Ministry of Commerce said yesterday, showing foreign investors attracted to the large export base and huge consumption market are not losing steam.

The total FDI in January was US$4.55 billion, up 10.99 percent compared to US$4.1 billion last January.

Hong Kong, the British Virgin Islands and Germany were the largest sources of foreign direct investment during the period, the ministry said.

Investment from 15 EU countries grew 70.8 percent year-on-year, according to the ministry. The EU has seen robust growth in its investment to China with a 22.5 percent growth rate during 2005. Investment from the United States reversed its decline from last year and increased by 19.7 percent in the first month. In 2005, US investment to China dropped by 22.3 percent.

According to the ministry, China saw 3,044 new foreign companies established in January, down nearly 15 percent, indicating a larger average value of a single investment deal.

But the ministry gave no details of contracted investments, which are deals signed but not yet executed.

During 2005, China drew US$60.3 billion in FDI, down slightly from the record of US$60.6 billion posted in 2004.

The fall, conspicuous against China's robust growth of 23 percent in foreign trade and annual gross domestic product growth of 9.9 percent, draws speculation that China is losing its charm to foreign investors.

The Ministry of Commerce, however, believes the last year's FDI slowdown does not mean China is not as attractive to overseas investors.

FDI to China is expected to stay at the same level as in 2005, said a ministry official who declined to be named.

"But the structure of foreign investment is expected to be improved as well as the quality and scale of foreign-invested projects," he said.

"Geographically, we hope investment to the western, central and northeastern China will grow at a rapid speed."

Jin Bosheng, an expert from the Chinese Academy of International Trade and Economic Co-operation, said the January figure at least proves to be a pleasant beginning to 2006.

"We have to wait for more monthly figures, but there is no reason for a drastic change since China still boasts for lower costs and big market," he said.

A survey by PricewaterhouseCoopers released late January showed a large number of chief executive officers plan to invest in China in the next three years to win customers in the world's fastest-growing major economy.

Fifty-five percent of business leaders said they plan to do business in China between now and 2009. Three-quarters of executives said they plan to win new customers in China, compared with the 48 percent who said they are investing in the country to primarily cut labour costs.

However, one possible damper on FDI is a long-awaited plan to unify the tax rate paid by domestic and foreign-invested companies, said Jin.

He said the change, which is expected to raise the tax rate by foreign firms, would probably have the greatest impact on investment in sectors already facing the threat of overcapacity.

Foreign firms enjoy preferential income tax rates as low as 15 percent while domestic firms are typically taxed at 33 percent. The National People's Congress, China's legislative body, is set to discuss revision of tax law for a unified business tax rate this year.

However, most companies will generally not stop their investment just because of the tax change, he said, and also noted there will be future tax breaks.

"High technology will continue to be some very good opportunities for tax relief on the coastal areas," he said.

Service, R&D likely to absorb foreign investment

"Service sectors, like finance, insurance, retailing and wholesale, and transportations will quickly attract investment with their further opening," said Zhao Jinping, director of Foreign Economic Studies at the State Council's Development Research Centre.

China will fully open its banking system to foreign investors by the end of this year, according to the nation's WTO commitments.

China has already allowed wholly foreign-funded companies in retailing and logistics sectors.

So far, just 20 percent of FDI is channelled into the services sector, while more than 70 percent is absorbed by the manufacturing sector.

According to Zhao, things will change as China fully opens its services market this year. "Service sector investment growth will be faster than in the manufacturing sector," said Zhao.

Meanwhile, according to a survey by AT Kearney, China will become the most attractive R&D location in the world within three years.

Low R&D costs, availability and quality of local R&D workforce, and protection of intellectual property are the three most important aspects in the evaluation of R&D investment locations.

China ranks highly in all three categories, and is especially favored by companies from the US, the United Kingdom, Japan and Germany, said AT Kearney.

(China Daily February 21, 2006)