China's foreign investment mix is changing, with portfolio investors buying more stocks but foreign direct investment falling to a two-year low on a slowing economy, rising business costs and anti-monopoly probes and crackdowns on foreign firms.
Foreign direct investment (FDI) in China fell in over the first seven months of 2014 compared with a year earlier, while the offshore funds flowing into mainland stocks hit the highest in more than two years last month.
A plateau in foreign investment could be a challenge for China, as it offers manufacturers an alternative source of capital to the banking system. Any shortfall is unlikely to be made up by portfolio flows, which favour more liquid stocks and are limited by quotas.
"Foreign capital coming here needs to get a lot more discriminatory," said Gary Reischel, founder of venture capital firm Qiming Venture Partners in Shanghai, referring to overall investment.
The stock market has risen for the past six weeks, its longest streak since March 2012, after being among the worst performers in the first half of the year.
Investors are drawn to Chinese shares by low valuations for large-cap shares after a four-year slump, a rallying yuan, and the prospect of a pilot project to allow foreigners to buy yuan-denominated stocks on mainland exchanges.
Non-financial foreign direct investment was $7.81 billion in July, the lowest in two years, and fell an annual 0.4 percent in the first seven months of the year.
Chinese regulators have warned against reading too much into a single monthly FDI figure, and many economists agree.
Still, in the context of July data that included softness in manufacturing, lending, housing prices and fixed-asset investment, the numbers have prompted some debate.
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The FDI slowdown was led by a sharp decline in investment from Japan, which plunged 45 percent in the first seven months of 2014; Europe, down 17.5 percent; and the United States, off 17.4 percent.
"There are other geographies in Asia that are definitely more attractive for manufacturing," said Matt Koon, consulting manager at Tractus Asia in Shanghai.
At the same time, there has been an increase in funds flowing into stocks via exchange-traded funds (ETF) in Hong Kong from foreign investors, who cannot yet invest directly in mainland equities.