Switch of funds to different sectors will ultimately be of immense benefit to china

The amount of foreign direct investment in China continued its slide during the first eight months of 2012, reaching $74.99 billion (58.19 billion euros), 3.4 percent down on a year earlier, according to the Ministry of Commerce.

However, a clear trajectory has appeared, showing a shift in FDI from manufacturing to services, and within the services sector, from real estate to research and development, logistics, finance, commerce and other business services.

The investment in the manufacturing sector fell by 6.66 percent to $33.74 billion, and that sector's share of total FDI inflow also fell to 45 percent. Whereas, FDI in the services sector fell by only 1.85 percent to $35 billion, and if the real estate sector is deducted, it was actually 5.31 percent higher year-on-year.

With labor costs continuing to rise in China, the relocation of export-oriented labor-intensive manufacturing investment is well underway.

Adidas announced in August that it would close its only manufacturing plant in China by the end of the year. Earlier, Nike announced a similar decision. In another manufacturing move, Starbucks is to produce its coffee cups in the United States.

More significantly, Ford has announced a shift of 12,000 jobs from China and Mexico back to the US, and Caterpillar is moving its OEM operations home from China.

Ironically, Ford also inaugurated two major assembly plants in China in August, with a total annual capacity of 800,000 units, expecting to double its China output by 2016.

It is easy to explain why Ford has started again in America. The Obama administration and state and local governments have offered numerous incentives to return manufacturing to the US. Ford signed a new labor contract with the United Auto Workers union, with all new workers accepting a $14-per-hour wage, making manufacturing in the US for the home market economically feasible.

Nissan also decided to build an assembly plant, in Tennessee, largely because it secured a federal loan of $1.4 billion, which covered 80 percent of its total $1.7 billion investment.

As to expanding sales in China, whose market is already 50 percent larger than that of the US and growing faster, investment in manufacturing there is certainly still the right choice.

The case of Caterpillar is different. The company's second quarter report shows that sales in China fell, whereas they enjoyed a solid growth in North America.

Caterpillar's report said that China's construction market had been weak and the company had to cut output and reduce inventory, although it expected a better second half of the year. It has decided to set up a plant in Texas making hydraulic excavators, assisted by a $14.3-million government grant.

Samsung, however, is a good example of the opposite. It has announced a massive project of $7 billion in Xi'an, Northwest China, in high-end electronics manufacturing.

For Ford, Caterpillar and Samsung, location choice depends on market prospects, cost reduction and likely investment returns. As China is faced with overcapacity in various manufacturing sectors, the slowdown or even a net fall in FDI in selected sectors is not only reasonable, but also necessary.

Manufacturing investment leaving China is only affecting some areas and is mostly from labor-intensive sectors. In the capital and services sectors, a company's return to the US or Europe is mostly due to receiving financial support from their own governments to supply home markets.

Investment in China will not alter fundamentally, but will move more toward supplying the domestic market.

A world investment report by the United Nations Conference on Trade and Development showed that FDI inflows into China in 2011 reached $124 billion, 8 percent up on the previous year, the second-largest after the US with $226.9 billion.

In the first five months of 2012, the world saw a net fall in cross-border FDI flows due largely to the weak global economy and euro zone debt crisis. The drop in FDI into China only coincided with the general trend.

The American Chamber of Commerce 2012 White Paper shows that 78 percent of member respondents ranked China in the top three destinations of their short-term investment plan, unchanged from 2011. But the percentage that placed it No 1 fell from 31 percent in 2011 to 20 percent.

The report also shows that 13 percent of the respondents thought China had lost the competitive edge "to a great degree" due to higher costs, as compared to 5 percent in 2011. It is a clear signal that China's cost-competitive edge is eroding fast.

On the other hand, 54 percent of the respondents envisage an increase of 11 percent or higher growth in their 2012 investment in China, the same as in 2011, and higher than the 51 percent in 2010. This shows that no moving out or fundamental changes have been planned.

And in the annual business confidence survey published in May by the European Union Chamber of Commerce in China, 74 percent of the 557 respondents said that China is becoming increasingly important in their companies' overall global strategy. As many as 63 percent said they were planning new investments in the country.

This is because they are shifting to higher-end manufacturing and services for Chinese local markets.

The top concern for multinational corporations investing in China is economic growth. The slowdown in growth means a poor market.

FDI into China has experienced fast growth for two decades. However, the early joint ventures that focused mostly on low-end processing (shoes, clothes and toys) are gradually being phased out because of rises in labor costs. Relocation by multinationals is now more market oriented, and to moving up the ladder to high-end manufacturing and services.

The focus on encouraging foreign investment in China will also change. The main competitive edge in attracting foreign capital should not be the labor cost, but a more sophisticated factor-mix.

Foreign investment in innovative, high-end manufacturing and new emerging industries and services should be encouraged - including in more automated manufacturing, alternate energy, biotechnology, cloud computing and software outsourcing, logistics, banking and finance, 3D motion and new materials.

The top concerns in an investment plan involve at least the following: The economic growth potential in the next decade and market size; transport; existing industries and technologies; the number and size of universities and type of graduates; research and development resources; government efficacy; legal environment; intellectual property right protection; and financial and legal services.

To keep sustainable FDI inflow to China, the new focus should be on advancing China's position in the global supply chain, concentrating on higher-end and emerging industries, and on modern, diversified services.

While remaining a top destination for FDI for years to come, China is likely to become a hot spot of a third industrial revolution, and contribute to strong, sustainable and balanced global economic growth.

The author is co-director, China-US/EU Study Center, China Association of International Trade. The views do not necessarily reflect those of China Daily.

(China Daily 10/05/2012 page9)