Foreign direct investment in China dropped for a fifth straight month in March on a slowing economy, limited prospects for gains in the yuan and renewed concerns that Europe’s debt crisis will worsen.

Inbound investment fell 6.1 percent from a year earlier to $11.76 billion, the Ministry of Commerce said today in Beijing, after a 0.9 percent drop the previous month. That’s the longest run of declines since the global financial crisis.

China’s economy expanded the least in almost three years in the first quarter and a widening of the yuan’s trading band this week signals that the government may tolerate more two-way moves in the currency against the dollar. The outlook for investment is still “grim” as Europe’s crisis persists and competition increases from other developing countries vying for foreign money, ministry spokesman Shen Danyang said today.

“This highlights the declining attractiveness of the country for foreign businesses amid a stronger currency and higher labor costs,” said Dariusz Kowalczyk, a Hong Kong-based strategist with Credit Agricole CIB. “Declining direct investment will further reduce China’s external surplus and lower appreciation pressure on the yuan.”

Stocks in China and Hong Kong dropped. The Shanghai Composite Index fell 0.2 percent at the 11:30 a.m. local-time break as the decline in foreign investment underscored concerns Europe’s debt crisis is hurting the economy. The Hang Seng Index declined 0.6 percent at the noon break.

Quarterly Decline

The yuan rose 0.17 percent today to 6.3045 per dollar after the central bank set the daily reference rate stronger. The currency had its first quarterly decline since December 2009 in the first three months of 2012.

Foreign investment in the first quarter fell 2.8 percent from a year earlier to $29.48 billion, the ministry said, after a 29.4 percent increase in the same period a year earlier. Investment in 2011 rose 9.7 percent to a record $116 billion. Kowalczyk estimates an increase to $123 billion this year.

First-quarter FDI from the European Union slumped 31.2 percent from a year earlier to $1.4 billion, the ministry said today. Investment from the U.S. rose 10.1 percent to $893 million.

Tap Demand

China’s economy expanded 8.1 percent in the first quarter from a year earlier, the government said last week. While that’s the slowest pace in almost three years, the economy will still grow in 2012 at more than double the pace for the world as a whole and more than four times the pace of the U.S., according to International Monetary Fund estimates in January.

Ford Motor Co. and Honda Motor Co. said this month they plan to expand to tap growing demand in China, the world’s biggest auto market. The U.S. carmaker announced an investment of about $600 million to increase capacity at one of its passenger-car factories while the Japanese company said it will add more models and may set up a research center.

Even as investment into China declines, the nation’s outbound spending to build factories and buy assets is surging. First-quarter non-financial outbound investment jumped 94.5 percent from a year earlier to $16.55 billion, the ministry said today.

Some Chinese companies are investing overseas as rising wages and other costs depress their profit margins in China, ministry spokesman Shen said.

Bloomberg