CHINA has emerged as the biggest external investor in Hong Kong's manufacturing industry after Japan and the United States, according to the latest survey by the Hong Kong government's Industry Department. The department's survey showed that China had invested a total of $4.4 billion in Hong Kong's manufacturing industry at the end of last year. The director-general of industry, Denise Yue, said that China contributed 11 per cent of the total external investment in Hong Kong, with contributions in industries such as textiles, clothing, electrical products and chemicals. 'China has been the third largest investor since 1985,' she said. China is an important and dominant external investor in all sectors of the Hong Kong economy. 'But whether it heads the list or not, I don't know,' she said. 'I believe China also has substantial investment in the hotel and real-estate business as well as in the stock market,' she said. Japan continued to be the leading investor in the manufacturing sector, investing $13.9 billion or 34 per cent of the total investments. Ms Yue said that the appreciation of the Japanese yen was one of the reasons for the channelling of Japanese investment to Hong Kong. She said that high labour costs in Japan had compelled Japanese firms to look overseas to lower production costs and enhance the competitiveness of their products. As labour costs in Hong Kong are still lower than in Japan, Japanese manufacturers find Hong Kong an attractive alternative to producing their products in Japan. The US was the second largest investor with investment totalling $11.5 billion or 28 per cent of total. The total value of external investments at original cost at the end of 1993 was $40.8 billion. 'In the manufacturing sector, we would like to see external investments coming into Hong Kong in technology transfers as well,' she said. She said the countries best positioned to transfer new technology to Hong Kong were Japan, Switzerland, Germany, France, the US and Britain. On the overall manufacturing investment environment in Hong Kong, Ms Yue said 59 per cent of the respondent companies considered it to be favourable. About 31 per cent of the respondents planned to expand their production in one of more aspects. Most companies commented favourably on Hong Kong's banking and financial facilities, infrastructure, regional location and government economic policy as well as the availability of managerial, professional and technical skills. However, foreign investors expressed concern at the rising costs of labour and office space. Seventy per cent of the companies surveyed expected business in 1994 to be satisfactory or good whereas 54 per cent felt the same about business prospects in 1995. The results of the Hong Kong Manufacturing Industries survey, also conducted by the industry department, showed that manufacturers blamed reduced profit margins on rising costs of production, especially labour costs, and those of industrial and office premises. Manufacturers also said that increased competition coupled with protectionist policies in some countries were hampering the growth of certain Hong Kong industries. Import restrictions on textiles and clothing imposed by the US and the European Union had inhibited growth of Hong Kong exports. The survey said that Hong Kong was vulnerable to international political and economic changes. that affected trading conditions.