Foreign direct investment (FDI) into China that had been growing for 17 years has seen a decline of 10 consecutive months since last October, amid the economic crisis.
Despite encouraging government policies, analysts forecast that the FDI cannot register growth until next year.
Still, international companies consider China as the best FDI destination because of its economic dynamism and population that is the world's largest.
China's FDI started to drop from the last quarter of 2008. The decline has eased off since this May, with a large quantity of hot money from abroad reportedly flowing into the country.
Starting from the second quarter, the decline in China's FDI has narrowed from 22.5 percent in April to 17.8 percent in May and 6.8 percent in June.
But as the Chinese government began to tighten the supervision and management of FDI source and volume, the nation's FDI fell sharply again by 35.7 percent from a year earlier to $5.36 billion in July, compared with a 6.8-percent dip in June.
"This (sharper decline) is partly due to enhanced supervision and management efforts by the Chinese government, which has noticed the possibility that more hot money is flowing into the country," said Zhang Xiaojing, director of the macro-economy department of the Chinese Academy of Social Sciences (CASS).
A recent report by the CASS found that as much as half of the $177.8 billion foreign exchange reserves China accumulated during the second quarter cannot be explained by either an increase in the FDI or trade surplus. This is probably hot money from abroad, the report concluded.
According to Stephen Green, head of Standard Chartered Research China, "hot money should not be a big concern to the management of China's FDI".
As multinational companies are still unwilling to invest overseas amid the sluggish global economy, China will continue to find it hard to attract overseas investment.
"The country's FDI will begin to register growth early next year at best," predicted Green.
Still, China has outperformed all other players in attracting FDI. A report by the United Nations Conference on Trade and Development said that, during the first quarter, FDI worldwide as well as overseas mergers and acquisitions fell by 54 and 77 percent, with the figures expected to drop by 50 and 67 percent for the whole year.
Based on studies of 240 international companies, the international agency also pointed out that China is still the most attractive destination for foreign investors amid the financial crisis, followed by India, the US, Russia and Brazil.
Many say the financial crisis has yet to dent China's confidence in investing overseas.
By the end of 2008, China led developing nations in investment overseas to maintain the position for six consecutive years. The country's outbound direct investment surged by 96.7 percent to $52.15 billion in 2008.
The momentum was even stronger during the first half of this year. By the end of June, overseas direct investment surged by 43.5 percent year-on-year to 907 projects. In May and June, the number of the deals hit 547, up 173.5 percent from the same period last year.
The financial crisis has provided historic opportunities for Chinese enterprises to invest overseas, said Cai Haitao, inspector of the department of policy research with the Ministry of Commerce.
"The cost is much lower, the barriers are fewer and the possibly large-scale deals are rising," he added.
Since last September to this June, the 20 major economies have rolled out more than 40 measures to encourage foreign direct investment, including lowering market access, simplifying approval procedures, adjusting tax policies and opening economic zones.
China's abundant and rapidly growing foreign exchange reserve is also providing Chinese enterprises access to raise funds for overseas investment.
By the end of the second quarter, China's foreign exchange reserves reached $2.13 trillion, the majority of which is in the US dollar. With the US economy still fluctuating and the Chinese government being called to diversify the reserves, many say one way is to grant loans to local companies for investing overseas.
Still, a number of analysts said China's overseas direct investment cannot surpass its FDI by volume this year, despite the strong growth momentum.
(China Daily 09/10/2009 page33)