TO THE POINT: Foreign direct investments continue to pour into China, hoping to cash in on the country's vibrant economy. China regained interest in the U.S. Treasury securities in March after four months of net sales. The economy of tropical Hainan Province is taking off, but its dependence on the property sector has ignited concerns. The aviation industry recoups its strength, with both profits and passenger traffic bouncing back. International accounting firm KPMG points to a bright prospect for China's service outsourcing industry over the next four years.

By HU YUE

Capital Destination

China has maintained its appeal to foreign investments thanks to a thriving economy and government policies to entice investors.

Foreign direct investment (FDI) rose 24.7 percent year on year to $7.35 billion in April, compared with an increase of 12.08 percent in March, said the Ministry of Commerce (MOFCOM). This was the ninth consecutive month that witnessed FDI growth on a yearly basis.

A total of 2,047 overseas-funded companies were approved during the month, up 21.3 percent from a year earlier.

The April figure brings the FDI in the first four months to $30.79 billion, growing 20.27 percent from one year ago. At the end of March, foreign investment in China had topped $1 trillion since 1978 when China first opened its door to overseas investors, said Liu Yajun, Director of the Foreign Investment Department under the MOFCOM.

China has been one of the few countries in the world that shows an economic pulse, and provides a high level of earnings visibility to foreign investors, said Wang Lu, a senior researcher with the State Information Center.

In addition, an improving business environment has also enhanced its attractiveness to foreign investments, said Wang.

The State Council released new regulations in April to support foreign investors in hi-tech industries, services sectors, energy-saving efforts and environmental protection. It also allowed local governments to approve foreign investment projects worth up to $300 million, compared with the previous cap of $100 million.

Scooping U.S. Treasuries

China increased its holdings in the U.S. Treasury securities by $17.7 billion in March to $895.2 billion, according to a report released by the U.S. Department of the Treasury on May 17.

This was the first increase in six months, and China remains the largest foreign holder of the U.S. Government debt, followed by Japan and the UK. In the previous four consecutive months, China had been shedding its holdings amid concerns over the safety of its U.S. dollar assets.

But now the country has a strong need to invest given a large number of foreign exchange reserves added in the first quarter of 2010, said Guo Tianyong, Director of the Researcher Center of China's Banking Industry under the Central University of Finance and Economics.

While the euro buckles under the heavy weight of the sovereign debt crisis, buying into dollar assets has become a relatively safe bet, he said.

Meanwhile, the U.S. economic recovery is also adding luster to the attractiveness of the debt, said Liu Yuhui, a senior researcher at the Chinese Academy of Social Sciences.

Red-hot Hainan

On the Chinese island province of Hainan, the economy is as hot as its tropical climate. GDP of the province in the first quarter grew a jaw-dropping 25.1 percent year on year, beating all other provincial economies.

For an economy trying to shake off the ripple effect of the financial crisis, this should be a reason to cheer, but the staggering pace of growth is triggering worries of its sustainability.

The biggest driver was undoubtedly the property sector that contributed 35.1 percent to economic growth. In the wake of a government program to turn Hainan into an international tourist destination last year, buyers and property developers poured in, forcing prices to shoot through the roof.

With history as a guide, such reliance on the property sector is a cause for concern. The island economy grew a robust 22.4 percent in 1992, drawing strength from a wild property rush. Only three years later, the growth rate fell abruptly to a minimum 4.3 percent as the real estate bubble popped, leaving the economy in deep doldrums.

The housing boom was also overshadowed by a weak economic foundation. The province's industrial added value reached 44.3 billion yuan ($6.5 billion) in 2009, barely 3 percent of neighboring Guangdong Province. Even its tourism revenue last year was only 21.1 billion yuan ($3.1 billion), 1.7 percent of the national total.

It is necessary now for the province to diversify away from property investments and strengthen efforts to propel industries and tourism, said Wang Yiwu, an economics professor with Hainan University.

Flying High

While its foreign counterparts reel from a global recession, China's aviation industry has basked in the glow of buoyant domestic demands.

The industry generated 9.39 billion yuan ($1.37 billion) in profits in the first four months of this year, almost 77 percent that of 2009, said the Civil Aviation Administration of China (CAAC). Of this total, domestic carriers earned 6.92 billion yuan ($1.01 billion) while the airports raked in 1.79 billion yuan ($262.2 million).

Li Jiaxiang, Minister of the CAAC, attributed the growth to a remarkable surge in air traffic, as well as a weak comparison base last year. In the January-April period, passenger volume expanded 16.1 percent from a year earlier, and cargo volume jumped 42.2 percent.

In addition, the government has also rolled out a series of support measures, including tax breaks and direct cash injections into ailing carriers. In its latest effort, the Ministry of Finance on May 5 announced to free airlines of business taxes on international routes to help them tap international markets.

Outsourcing Expands

China's service outsourcing market is expected to grow at a compound annual rate of 26 percent to $43.9 billion by 2014 as demand continues to increase, said a recent report by the international accounting firm KPMG.

"The service outsourcing industry is a fairly new business model concept in China but is growing rapidly," said Ning Wright, a KPMG partner, in Shanghai. "Increasing investment by overseas companies in China is sparking bigger demand for outsourcing services."

To save costs and preserve cash, international companies are increasingly spreading out their non-core businesses ranging from handling payrolls to running customer call centers. In 2009, China's service outsourcing companies more than doubled to over 9,000 from 2008, said the MOFCOM. They won a total of 60,247 service outsourcing contracts last year worth $20 billion, a surge of 186 percent from one year ago.

But one concern is domestic service outsourcing firms find it difficult to secure offshore contracts due to a lack of economies of scale.

Wright said she expects more merger and acquisition activities in the industry in three to five years as domestic suppliers build up their scales to compete with bigger rivals overseas, such as those in India.