China FDI rises strongly in January, outlook bright

•  Rising FDI shows China remains attractive for investors
• Rising costs force foreign firms to move toward inland
• Ministry says new M&A checks in line with WTO rules

BEIJING (Reuters): Foreign direct investment in China rose 23.4 per cent in the year to January to $10 billion, the Commerce Ministry said on Thursday, as global firms pour in despite concerns about market barriers and rising labour costs.

Inflows, which surged in the years after the country joined the World Trade Organisation in 2001, are recovering after being hit hard by the global economic slowdown.

“With China’s economic restructuring going on, foreign direct investment in the service sector will surely expand more quickly in the future,” spokesman Yao Jian told a regular briefing.

Rising labour costs and raw material prices have been driving foreign manufacturers from the eastern part of China to the less developed inland areas, Yao said, which fits with the government’s objective of fuelling the rural interior to catch up with the long-booming coast.

China’s fledgling service industry drew $4.69 billion in foreign investment in January, up 31.8 pct from a year earlier, he said.

China attracted $105.7 billion in foreign direct investment in 2010, including a record $14 billion in December.

Yao said the country would attract more foreign investment in the form of mergers and acquisitions, which accounted for only 3 per cent of the latest total FDI.

“In the coming years, the investment through mergers and acquisitions will take up an increasing share of our country’s total foreign investment, say about 6 to 7 per cent,” he said.

Some foreign investors expressed concerns about Beijing’s new rules on vetting foreign acquisition deals, but Yao repeated the official stance that they were in line with the World Trade Organisation rules and international practices.

“With the share of mergers and acquisitions increasing in investment, it is very necessary for us to learn from the international rules and establish such a security checking system as early as possible,” he said.

China’s cabinet said on Saturday that it would launch an investment review body to check foreign M&A deals do not endanger national security.

Firms such as General Electric have also voiced worries that Beijing’s “indigenous innovation” policies could hinder its ability to compete in China.

But most global companies remain bullish on China’s growth prospects, particularly as the government tries to boost domestic consumption to reduce reliance on exports and investment.

Foreign direct investment, along with trade surpluses and speculative inflows, have fuelled the rapid build-up on China’s foreign exchange reserves, put upward pressure on the yuan and added to inflation risks.

To counter growing fund inflows, the government has encouraged domestic companies to boost overseas investment.

China’s outbound direct investment rose 15.9 per cent in the year to January to $2.74 billion, the ministry said.