Direct investment from Japan and the United States in China plunged between January and October of this year, which the government said highlighted the country's transition from a low-profit to a high-end manufacturing economy, and ongoing levels of overcapacity.

During the 10-month period, [Company Incorporation USA]direct investment from Japan fell 42.9 percent, and from the US by 23.8 percent from a year earlier, but that from South Korea and the United Kingdom surged 26.4 percent and 32.4 percent, respectively, the Ministry of Commerce said.

FDI inflows, which exclude investment in the financial sector, totaled $95.88 billion, a drop of 1.2 percent from the same period a year earlier, although a slight improvement on the 1.4 percent drop registered over the first nine months of the year.

Shen Danyang, the ministry's spokesman, said as the US and Japan had previously focused on investing in China's manufacturing industry, the country's ongoing economic upgrading and measures to tackle industrial overcapacity and protect the environment had affected investment activity in the sectors.

As China continues restructuring its economy, the service sector has become a strategic priority, with the central government issuing a number of guidelines this year to support its development.

As a result, Shen said the ministry had noticed fast growth in service sector FDI. The sector will "continue to benefit from further development policies", he said.

Shen said future FDI to China is likely to continue to shift from manufacturing to the service sector as well as other high-tech manufacturing industries such as rail, telecommunications and electronic equipment.

The latest ministry figures show that $53.1 billion worth of FDI went to China's service industry in the first 10 months, a 6.6 percent rise on the same period a year earlier, while $32.5 billion still flowed into the manufacturing industry.

China has gradually opened up its finance, logistics, energy saving, telecom and environmental protection sectors to overseas companies, and encouraged Chinese and foreign companies to cooperate in knowledge-intensive sectors such as software engineering and cross-border e-commerce.

"Rising manufacturing costs are another pressing problem that can be solved by improving the service sector," said Zhao Zhongxiu, a professor at the University of International Business and Economics in Beijing.

"Increases in labor and resource costs in China and other Asian economies have prompted many American companies to move back to the US."

China has relaxed its policies to attract more FDI, meaning foreign or joint venture investments between $100 million and $1 billion in value need to be approved by the central government, and projects worth $2 billion or more also need to register with the State Council, [Hong Kong Company Registration Guide]according to the 2014 Catalogue for the Guidance of Industries for Foreign Investment, also released on Tuesday.

Only projects in sensitive countries or regions, as well as in sensitive industries, will require approval by the Ministry of Commerce.

"Sensitive" countries or regions are defined as those that have no diplomatic relations with China or those under United Nations sanctions. Other overseas investment projects need only be registered with the ministry.