Foreign direct investment growth in China fell year-on-year for the first time in 28 months, with November's $8.8 billion of commitments down 9.8 percent and hurt by a sharp drop in inflows from the United States, Commerce Ministry data showed Thursday.

The fall -- the first since July 2009's 35.7 percent year-on-year collapse to $5.4 billion -- saw year-to-date FDI flows ease to 13.2 percent from 15.9 percent previously, bringing the total to a robust $103.8 billion and still leaving 2011 poised to be a record-breaking year for FDI.

The slowdown in the rate of FDI growth comes on top of recent data which showed the first net capital outflow from China in four years in October, part of a recent trend of capital flight from emerging markets largely inspired by Europe's festering debt crisis.

But Hua Zhongwei, an economist with Huachuang Securities in Beijing, says the long-term allure to global investors of the world's second biggest economy remained strong and he expected a reasonably swift return.

The Chinese market is too big to be neglected for most foreign companies, Hua said. Once the dust settles, foreign investment inflows into China are expected to rise steadily again.

But he noted that rising costs in China and a slowdown in the global economy were forcing some low-end manufacturers to relocate to other regions.

For those that rely heavily on cheap labor as an advantage, China may seem to be an increasingly unwelcoming place, he said.

U.S. INFLOWS SINK

Data from the Commerce Ministry showed that U.S. investments in China dropped to $2.74 billion in the first 11 months of the year, down a deep 23.1 percent versus the same period last year.

Investments from the European Union -- China's single largest trading partner -- were $5.98 billion in the January-November period, up a tiny 0.29 percent from a year earlier.

Investments from 10 of China's Asian neighbors, including Hong Kong, Taiwan and Japan and South Korea, however, jumped 17.98 percent to $89.6 billion in the same period.

Service sector FDI was up 18.6 percent between January and November, more than twice the 7.6 percent rate of growth in the manufacturing sector in the same period.

Separately, China has approved 74 yuan foreign direct investment (FDI) projects since the yuan FDI rules were launched in October, with total investments of 16.53 billion yuan ($2.6 billion), Huang Feng, a foreign investment official with the Ministry of Commerce, was quoted by the local media as saying.

Investment inflows, which surged in the years after China joined the World Trade Organisation in 2001, have recovered strongly after being hit hard by the global economic slowdown.

EXPORT OUTLOOK SEVERE

But the darkening backdrop is clearly concerning Chinese officials, with economic growth having slowed for three straight quarters and many forecasters expecting it to dip in 2012 below 9 percent for the first time since 2001.

The overall trade environment next year for China will be complicated, partly due to the economic uncertainties in the European countries, and I should say that the export situation in the first quarter of next year will be very severe, Commerce Ministry spokesman Shen Danyang told a news conference at the release of the FDI data.

Growth in Chinese exports and imports slowed in November, fresh evidence of faltering demand abroad and at home that is pushing Beijing towards a more explicit pro-growth policy stance, according to data published on December 10.

Customs data showed exports at their most sluggish in two years -- stripping out the volatile month of February, which was affected by the Lunar New Year holiday.

The uncertainty of the external environment saw China on Wednesday pledge to guarantee growth in the face of an extremely grim outlook for the global economy in 2012, rounding off its annual policy-setting conference with a series of commitments to deliver economic stability. [ID:nL3E7NE3R9]

The HSBC flash manufacturing purchasing managers' index (PMI), the earliest indicator of China's industrial activity, showed China's factory output shrank again in December after new orders fell, entrenching views that manufacturers are struggling with waning global demand and tight domestic credit conditions.

The index stood at 49 in December, a modest rise from November's 47.7 but pointing to a monthly contraction in activity nonetheless. [ID:nL3E7NF0OE]

Economists say fine-tuning of economic policy towards a pro-growth setting is already under way. Data showed Chinese banks made 562 billion yuan of new loans in November, a shade more than forecast as Beijing gently eases tight credit conditions.

Bank lending is a focal point in China's monetary policy as it is controlled by the government to steer economic growth and control inflation.

Inflation appears to be coming off the boil, having fallen from a three-year high of 6.5 percent in July to 4.2 percent in November, but stability-obsessed Beijing is wary of any policy that might fire up prices again.

Periods of high inflation have historically been accompanied by periods of social tension, making the leaders of China's ruling Communist Party particularly sensitive to sharp price rises or a sudden erosion of consumer spending power.

(Reporting by Aileen Wang and Don Durfee; Editing by Nick Edwards and Alex Richardson)

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