Why did inflows of foreign direct investment to China jump by a strong 16.1 per cent to $10.8bn in January?

Such a robust performance may seem counterintuitive. The Chinese economy slowed last year. Its manufacturing competitiveness is being eroded by a welter of rising costs. Several high-profile incidents – a corruption scandal at GSK, the UK pharmaceuticals company, a $580m write-down on a China acquisition by Caterpillar, the US machinery giant, and the retreat of Revlon Inc, the cosmetics company, have all raised questions over the longevity of China’s allure.

But even so, say analysts, the country retains its attractiveness for foreign investors simply because it generates superior returns.

“The income generated by foreign enterprises in China is among the highest in the world,” says Ryan Rutkowski, research analyst at the Peterson Institute for International Economicsin Washington.

“For example, the returns generated by FDI stock in China averaged 9.4 per cent between 2002 and 2012, compared with only 5.8 per cent for investment in the US. Even as the Chinese economy slowed last year, returns were still around 9.1 percent,” Rutkowski adds.

In addition, two other significant changes are taking place. Foreign companies are gaining more control over their investments than in the past – a full 76.2 per cent of inflows these days are in the form of wholly-owned ventures, representing a big shift from the joint-venture focus of the past, Rutkowski says (see chart).

The other change is in the industry destination of investment. Whereas in the past, manufacturing was the lodestar, these days it is increasingly the fast growing service sector that is soaking up the lion’s share of the inflows. If the promises of the Shanghai free-trade zone are realised, the emphasis on service sector investments may yet further intensify.

January’s numbers show the trends

January was the 12th consecutive month to show an FDI increase, following a stretch of eight straight months of year-on-year declines until January 2013. Total FDI inflows into China in 2013 rose to a record $117.6bn.

The turnaround has been largely due to the growing interest among multinationals toward the service industry. In January, services attracted $6.33bn, up 57 per cent from a year earlier – representing 58.8 per cent of total FDI. Manufacturing pulled in $3.47bn, down 21.7 per cent from a year earlier and representing just 32.2 per cent of the total.

The geographical pull for foreign investors is also in flux. FDI flowing into central and western parts of China rose 89.1 per cent and 71.3 per cent respectively to $1.57bn and $989m. Of course, the developed coastal and eastern areas still accounted for the majority at $8.21bn, but this was up just 4.4 per cent from a year earlier, suggesting that the trend is shifting decidedly in favour of the less-developed interior.

Related reading:
Hot flows Vs FDI: Companies still betting long term on emerging markets
, The World
Barack Obama mounts big push to bolster FDI in US
, FT

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