News Analysis: Shift in foreign investment in China in line with rebalancing efforts

As some foreign companies are closing down their factories in China, concerns also grow that foreign investors are massively leaving China.

Such worries, though containing some legitimacy, were overblown as a breakdown of foreign direct investment data showed that the labor-intensive manufacturing sector sees less investment, while foreign investment in the service sector still registers strong growth, analysts said.

The shift is in line with China's economic rebalancing efforts - - steering itself away from an export-reliant economy toward one driven by domestic consumption, they added.

Foreign companies originally went to China because they considered China as part of the global production chain as well as a platform to export elsewhere, Scott Kennedy, deputy director of the Freeman Chair in China Studies at the Center for Strategic and International Studies (CSIS), told Xinhua.

Due to rising labor costs and other reasons, companies that are most sensitive to rising production cost in China are potentially considering moving elsewhere, said Kennedy.

According to a survey conducted by the American Chamber of Commerce in China, 15 percent of its member companies have moved or are planning to move capacity or investments outside of China in 2014, due to high labor costs.

He Fan, a researcher at the Chinese Academy of Social Science, held a similar view and told Xinhua that labor-intensive industries in China are facing challenges due to rising labor cost pressures.

Along with China rebalancing to consumption-led and service- focused growth model, foreign investments which are in line with the rebalancing trend will continue to gain growth momentum, while those that cannot adapt to the trend will consider leaving, said the researcher.

The official data also spoke of the same story.

According to China's Ministry of Commerce, foreign direct investment (FDI) inflows to China's service sector grew 30 percent year on year in the first two months of this year and their share in the total FDI inflows reached 61 percent. On the contrary, the FDI inflows to China's manufacturing sector grew at a smaller pace of 7.1 percent and only accounted for 33.3 percent of the total FDI inflows to China.

A research by the United Nations Conference on Trade and Development found that FDI inflows to China in 2014 were mainly driven by an increase in those to the service sector, while FDI to the manufacturing sector fell, especially in industries that are sensitive to rising labor costs.

Although some companies are withdrawing investment from China, most American companies are continuing doing business in China, because of the potential of the Chinese market and their need to be close to their customers, said Kennedy.

A recent CSIS report said that after 35 years of rapid growth, China has become the largest economy in Asia and will soon be the largest in the world by any measure, and no other economy will have more impact on U.S. growth and prosperity over the coming decades.

But given the size and the importance of the Chinese market, the likelihood of foreign companies massively abandoning China for producing elsewhere is very unlikely, said Kennedy.

In regard to China-U.S. bilateral investment relationship, Kenneth Liberthal, a senior fellow at the Brookings Institution, said the big thing that is going to change the future is bilateral investment treaty (BIT) that the two sides are negotiating on, especially whether China could open up high value-added services to foreign investors.

Kennedy believed that the BIT will benefit both economies and investors from both countries. Endite