The Commerce Ministry said on Tuesday that the country drew $37.9 billion in foreign direct investment (FDI) between January and April, down from $38.8 billion attracted in the same period in 2011. April's inflow alone was $8.4 billion, down from $8.5 billion a year ago.

"We believe the negative trend reflects concerns over China's lower growth potential, lack of confidence in the global growth outlook, and poorer access to funding from deleveraging banks," Dariusz Kowalczyk, senior economist and strategist at Credit Agricole-CIB in Hong Kong, said in a note to clients.

"It is worrying that despite very favourable base effects, foreign direct investment is continuing to shrink," he said.

FDI is an important gauge of the health of external economy, to which China's vast factory sector is oriented, but it is a small contributor to overall capital flows compared to exports, which were worth about $1.9 trillion in 2011.

FDI from the European Union dropped 27.9 percent year-on-year in the January-April period, while inflows from the United States rose 1.9 percent. FDI from 10 Asian economies rose 0.6 percent to $33.1 billion in the same period, the ministry said.

A weaker-than-expected reading from economic data released last week raised investor concerns that a five-quarter long slide has not bottomed and more must be done to support growth.

TRADE WOES

Trade data had set the scene, with April's 4.9 percent annual rate of export growth barely half that forecast by economists and import growth at a standstill, expanding by just 0.3 percent versus expectations of 11 percent growth.

A ministry spokesman told a news conference after the FDI data was published that it was impossible to say whether the outlook for trade was either optimistic or pessimistic.

"Looking from the trade data last month and the deals signed at the Canton trade fair, China's export situation is still severe," the spokesman said.

The just-concluded Canton Fair, a bi-annual export trade fair widely considered a barometer of China's export growth, saw the value of signed export deals shrink 2.3 percent from a year ago, the first annual drop since the global financial crisis.

"Providing that there is no sharp external slowdown, China's trade growth may grow at a slower clip in the early months of the year and then stabilise in the middle period of this year before picking up in the final several months."

China has an official target of 10 percent growth in exports and imports for 2012 and both have been volatile in the opening months of the year, with demand in its two biggest customers - the European Union and the United States - tepid at best.

The first quarter as a whole was largely in balance and the ministry spokesman said for the year overall trade might be at a "basically balanced level", albeit with a slight surplus for the full year. The April trade surplus of $18.4 billion was unlikely be representative of the whole year, he said.

China's trade surplus as a proportion of economic activity has been shrinking for several years. The country's overall current account surplus was 2.8 percent of GDP at the end of 2011, having been as high as 10.1 percent in 2007.

POLICY EASING

China's central bank said on Saturday it would cut the proportion of cash that banks must hold as reserves by 50 basis points, effective from May 18. It should free an estimated 400 billion yuan for lending to head-off the risk of a sudden slowdown in the world's second-largest economy.

Economists in the latest Reuters poll see the annual rate of economic growth dipping to 7.9 percent between April and June, the first time it will have fallen below 8 percent since 2009, a level regarded by many investors as the minimum growth needed to ensure sufficient job creation.

China has been fine-tuning economic policy setting since the autumn of last year as the outlook for the global economy darkened, export growth sank and capital inflows - a core component of money supply - stalled.

Beijing has an official target for M2 money supply growth of 14 percent. Data last week showed that the annual rate of growth had slowed to 12.8 percent in April, implying that either capital inflows have to rise or local banks have to ramp up credit creation to meet the target.

China drew a record $116 billion in foreign direct investment in 2011. The Commerce Ministry aims to attract an average of $120 billion in each of the next four years.

(Writing by Nick Edwards; Editing by Ramya Venugopal)

• A Permanent Economic Emergency