China's economic growth could be slowing further as data on Thursday showed the first year-on-year drop in foreign direct investment in 28 months and a fresh fall in new orders signaled a further contraction in factory activity.

The data highlights increasing risks to China's growth emanating from a deterioration in developed market economies while domestic demand is being dented by government efforts to rein in rampant real estate inflation.

Growth momentum remains weak with additional downside risks from exports and the property market not yet fully filtering through, said Qu Hongbin, chief China economist at

HSBC.

With inflation quickly shifting to disinflation, the Chinese government can and should make more aggressive easing on both fiscal and monetary fronts to stabilize growth and jobs.

Qu's comments accompanied the release of the HSBC flash manufacturing purchasing managers' index (PMI), which showed China's factory activity shrank again in December after new orders fell.

The PMI, the earliest indicator of China's industrial activity, is likely to entrench views that manufacturers are struggling with waning global demand and tight domestic credit conditions.

The contraction indicated by the PMI came swiftly after Commerce Ministry data revealed the first year-on-year fall in foreign direct investment growth in China in 28 months.

November's $8.8 billion of commitments were down 9.8 percent on November 2010, the first fall since July 2009's 35.7 percent year-on-year collapse to $5.4 billion.

A sharp drop in inflows from the United States was a particular drag, slowing year-to-date growth in FDI flows to 13.2 percent from 15.9 percent in October's data.

Still, total FDI in the year to date of $103.8 billion suggest 2011 is poised to be a record-breaking year.

The slowdown in FDI growth comes after the first outflow in net capital from China in four years in October, part of a recent trend of capital flight from emerging markets largely driven 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 rebound.

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.

Hua noted, however, 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 23.1 percent from a year earlier to $2.74 billion in the first 11 months of the 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 Organization 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, data showed 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.

PMI data delivered more evidence of a further slowdown in export orders. They barely grew on the month and a sub-index of output prices signaled a further fall in the prices Chinese firms were able to charge to get goods out of the gates.

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.

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.

However, Beijing this week also promised a tight leash on the property sector to cool housing prices and bring them back to a reasonable level, which some investors fear could add to the risks of an economic hard landing as prices and investment fall.

(Editing by Nick Edwards and Alex Richardson)

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