By  on August 24, 2009

BEIJING — With its trade ties with the United States and other countries strained, and the global financial crisis not yet over, China is working to reassure the world it remains the best place for foreign investors to park their capital.

Despite deep declines in foreign investment, analysts say the textiles and apparel industry is bound to recover and begin seeing new investment as soon as the world’s economy gets back on its feet. They note even though China has lost some of its competitive edge, no other country is poised to completely take its place in large-scale manufacturing.

The Chinese government last week released new figures showing the country’s foreign direct investment, or FDI, fell by 35.7 percent in July from the same month a year ago. The decline marked a continuing pattern that began with the onset of the credit crunch last fall, with 10 months in a row of falling foreign direct investment in China. Although the government has been pushing long-term economic development for more homegrown innovation and domestic consumer demand to wean itself off a reliance on exports, China remains heavily dependent on foreign direct investment.

“We still need a lot of foreign investment, that’s for sure,” said Lu Yayong, of the China Research Center of Foreign Direct Investment. “With too little capital invested in private businesses and the country’s high savings rate, foreign investment is very important for the development of this economy.

“It also introduces new ideas and advanced technologies into China, and helps maintain the strength of the market,” said Lu.

Yet recent developments in several areas have posed a potential threat to China’s position as the world’s leading destination for FDI. While many say the slide in FDI is partly due to government controls on unapproved foreign currency flows, there is little doubt the global economic slump has left a deep impression.

“The textile industry takes in a considerable amount of foreign investment,” said Wang Rong, a textiles industry analyst at United Securities in Shenzhen. “As factories lost orders during the crisis, a lot of foreign investment was withdrawn, which led to closures of factories.”

Wang said many factories have now resumed production, thanks in part to government stimulus spending but, “they are not necessarily making money.”

In recent weeks, trade tensions with the United States have scaled up, in particular with a World Trade Organization decision against China for blocking imports of international movies and publications and a subsequent ruling by the U.S. International Trade Commission over textile products (see related story, below). China is appealing the WTO decision. The U.S. must also decide soon whether to impose tariffs on Chinese tires that would reduce imports.

The U.S. government has also expressed concern about China’s July arrests of four executives of the Australian mining giant Rio Tinto, later charged with corporate spying and bribery and now awaiting trial. In a news conference in Washington, D.C., on Aug. 13, a spokesman for the U.S. State Department said the Rio Tinto case and China’s lack of transparency could affect foreign investment.

“China and how it reacts to cases like this will have a bearing on the international business climate and the willingness of individual businesses to invest in China,” said State Department spokesman Philip J. Crowley.

The Rio Tinto case, he said, “seems to raise questions about its business interactions with businesses and with countries, obviously, that can have a bearing in terms of willingness of firms around the world to invest in China in the future.”

Song Hong, an economist with the Chinese Academy of Social Sciences, said the Rio Tinto case could actually help China’s investment climate in the long run. Although the charges have not been laid out in detail, the company maintains its employees are innocent and nobody has been convicted, Song said a tough ruling on Rio Tinto could help deliver a message.

“The handling of the case may deliver a good message to investors, that is China respects rules of the market and there is law to abide,” said Song.

Industry analyst Wang is confident investment will return to China’s manufacturing sector once recovery takes hold globally.

“Foreign investors are still very careful now,” said Wang. “When the situation comes clearer, I think they will come back into the industry.”

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