China has for years been one of the world's biggest recipients of foreign direct investment, money that has helped turn the country into the world's factory floor. Yet China's take of direct investment dropped slightly in 2005, excluding a series of one-time deals in the financial sector. After a 12% plunge in June, the figure is down a further 0.5% for the first half of 2006.

Many factors are at work. At this point, much of the manufacturing that can be profitably shifted to China has already moved, while the lowest-end production is starting to migrate away to less-expensive locations. And while multinationals' interest in China is broader than just export-driven manufacturing, the difficulty of buying domestic companies and the limits on foreign participation in service businesses are keeping those channels from becoming big new drivers of investment.

Government officials say they aren't worried by a modest drop in investment, but acknowledge that some foreign companies are starting to look elsewhere as wages and land prices have risen.

Taiwanese companies, which were among the first to recognize and exploit China's advantages in low-cost manufacturing, are now putting much of their new investment in other Asian countries.

Yet, stagnation or a small decline in foreign direct investment isn't necessarily bad news for China. At a time when the biggest worry is that the economy could be growing too fast and authorities are trying to slow down domestic investment, a reduction in foreign inflows is probably welcome. Less foreign investment could also trim the external imbalances that created pressure on China to push up the value of its currency, the yuan.

Optimists see in all this a welcome stimulus for Chinese companies to move out of low-cost production. "You don't want to be a place that can only attract low-end industries," says Nicholas Kwan, an economist with Standard Chartered Bank in Hong Kong. For foreign investment, he says, "Increasingly, the quality matters more than the quantity."

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