January 19, 2008 / 11:30 AM / in 10 years

UPDATE 1-China investment inflows brisk despite scrutiny

(Adds background, details, analyst quotes)

By Jason Subler

BEIJING, Jan 19 (Reuters) - China drew $74.7 billion in foreign direct investment in 2007, underlining its continuing attractiveness to international companies despite an increasingly choosy stance by Beijing.

The number was reported on Saturday by the official Xinhua news agency, which quoted the Commerce Ministry. It did not specify whether the figure included investments in the financial sector.

The Commerce Ministry usually reports only non-financial FDI, which came to $61.67 billion in the first 11 months, an increase of 13.7 percent from the year before.

In 2006, China attracted a record $63 billion in non-financial FDI, or $69.5 billion if investments in financial institutions are included. The record year for overall FDI was 2005, when foreign banks paid billions of dollars for minority stakes in several big state-owned lenders.

In any event, the 2007 total shows that investors continue to pour money into China despite a shifting policy landscape.

Beijing has thrown up restrictions to foreign capital in a range of sectors, including mining and energy, while encouraging more FDI in areas such as environmental protection and high-tech.

Such selectiveness would probably not dent overall foreign investment but could increasingly channel it away from low-margin manufacturing, the mainstay of past FDI, analysts said.

“Labour-intensive industries and the processing trade may see a large drop in foreign investment,” said Ding Zhijie, an economics professor at the University of International Business and Economics in Beijing.

Inward investment has surged since China joined the World Trade Organisation in late 2001, with non-financial FDI averaging more than $1 billion a week and exceeding $60 billion in each of the last four years.

FDI dwarfs China’s investments overseas.

Although Beijing is encouraging Chinese firms to expand abroad, Xinhua said outbound investment was about $20 billion in 2007, or less than a third of inflows, compared with $21 billion in 2006.

MOVING UP, NOT OUT

While overall FDI could slow this year, firms that focus on domestic consumers would continue to find plenty of opportunities to turn a profit even as new policies increase costs, Ding said.

    A new corporate income tax law introduced on Jan. 1 will gradually phase out the preferential rates enjoyed by many foreign companies; a new labour contract law, which also took effect on Jan. 1, will force employers to give more of their workers long-term contracts and make it tougher to fire them.

    “There will be some industries where, for cost and other reasons, China will become somewhat less competitive,” said Lester Ross, partner-in-charge with law firm WilmerHale in Beijing.

    “But in the higher-value-added industries -- telecoms and so forth -- I think that there’s a tremendous desire on the part of companies to invest here,” Ross said.

    A number of global giants gave China their vote of confidence in 2007. Intel Corp (INTC.O) began work on a $2.5 billion microchip plant in Dalian in the northeast, while Airbus EAD.PA broke ground on an assembly plant in the northern port city of Tianjin.

    Despite rising costs, many businesses cite China’s solid infrastructure, large base of suppliers and pool of relatively skilled yet affordable labour as major attractions -- on top of its double-digit economic growth and growing consumer market.

    Still, Western business groups say that Beijing is not doing enough to improve government transparency, protect intellectual property rights or cut down on red tape.

    Some investors have expressed concerns that the new anti-monopoly law, which will take effect on Aug. 1, could be used to curb acquisitions by foreign firms.

    Ross with WilmerHale cautioned that foreign companies in less favoured industries should brace for greater difficulties as some domestic players could seek to use new government initiatives to their advantage.

    “I think that we’ll see restrictions essentially cloaked in the name of conservation and environmental protection,” he said. (Reporting by Jason Subler, additional reporting by Lucy Hornby and Langi Chiang; Editing by Alan Wheatley and Michael Roddy)

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