China top spot for FDI in world in 2014

China was the top destination for foreign direct investment (FDI) in 2014, according to a new United Nations report, despite concerns of the nation's economic slowdown. And the main engine of the economy is no longer manufacturing but the service sector.

The Chinese mainland is estimated to have attracted $128 billion of FDI in 2014, followed by Hong Kong with a $111 billion FDI, according the latest Global Investment Trends Monitor report released on Jan 29 by the United Nations Conference on Trade and Development (UNCTAD).

"There's an increase of FDI into the services sector, and a slowdown of growth into manufacturing," James Zhan, director of UNCTAD's investment and enterprise division and lead author of the annual report, told Reuters. "Within manufacturing, investment into high tech is growing while labor intensive FDI has been declining."

Foreign money's flow into the Chinese service sector grew 7.8 percent and constituted 55.4 percent of the overall FDI, according to the Ministry of Commerce. Meanwhile, foreign investment into capital-intensive industries dropped 12.3 percent last year and made up only 33.4 percent of the total FDI.

China's inbound FDI grew 1.7 percent last year, much slower than the 5.3 percent of 2013, suggesting a transition in the structure of the Chinese economy, according to the Ministry of Commerce. In 2013, Chinese inbound FDI dropped 3.7 percent, the first full year drop since 2009.

The fluctuations reflect the slowing-down of China's economic expansion and a transition of China's economic structure. China's GDP grew 7.4 percent in 2014, according to the National Bureau of Statistics.

China's traditional advantage in the manufacturing sector is decreasing, as labor costs keep rising and many manufacturers shift their production to Southeast Asia and other places with cheaper labor. Some manufacturers have decided to shift their operations back to developed economies because high-end manufacturing is driven by technology not by labor costs.

The United States, which dropped from first place to the third, lost nearly half of its FDI from $159 billion in 2013 to $86 billion in 2014. It was mainly because of the Verizon-Vodafone deal, in which Verizon bought back from UK's Vodafone $130 billion worth of shares in a joint venture. Zhan expected the inbound FDI flow into the US would resurge in 2015.

The US government is stepping up efforts to lure more foreign investment. A second summit of SelectUSA, a US government program to promote and facilitate foreign investments in the country, is expected to be held in March.

The Chinese delegation is expected to continue to be the largest attending. At present, the US has in China about $50 billion of FDI stock (about 2 percent of China's total FDI), while China's FDI in the US is around $36 billion.

"FDI flows dropped 8 percent last year globally, because economic uncertainty and geopolitical risks including regional conflicts," said the report.

Lu Huiquan in New York contributed to this report.