China's foreign direct investment (FDI) for July surged by 29 percent from a year earlier.

The figure represents the second highest monthly growth this year and highlights the confidence of foreign businesses operating in China despite recent suggestions about a challenging investment climate.

The Ministry of Commerce said on Tuesday that the FDI rose by 29.2 percent year-on-year to $6.92 billion in July, the 12th consecutive monthly gain and the fourth month this year that the figure was above 20 percent.

The high growth was buoyed up by larger volume of foreign funds into the service sector and China's western and northeastern regions, and such trends will continue, analysts said.

"The growth is mainly attributed to China's prospering macro-economic environment, fast economic growth and the vast potential of domestic consumption," said Yan Jinny, economist at Standard Chartered Shanghai.

"The momentum should last for the rest of the year."

China surpassed Japan as the world's second largest economy in the second quarter as Japan's nominal gross domestic product from April to June reached $1.288 trillion, compared with China's $1.337 trillion. Economists believed China is "highly likely" to surpass Japan in terms of GDP this year.

China's domestic consumption has also been expanding rapidly. During the first seven months, retail sales of consumer goods increased by 18.2 percent year-on-year to 8.5 trillion yuan ($1.25 trillion), according to the National Bureau of Statistics.

Li Xiaogang, director of the Foreign Investment Research Center at the Shanghai Academy of Social Sciences, said the strong GDP figures were part of the reason that helped maintain vibrant FDI growth for July. The "low reference point" back in July last year was also a factor, Li said, when China's FDI declined 35.7 percent to $5.36 billion.

But "China's economy is attractive enough to see more international businesses invest here," Li said.

"China's FDI will continue to grow in the coming months not least because of China's foreign exchange rate reform and the possible rising yuan in the near future," said Huo Jianguo, director of the Chinese Academy of International Trade and Economic Cooperation.

During the first seven months, China's FDI increased by 20.7 percent to $58.35 billion. The top investing nations include Singapore, Japan, South Korea, the United States and Germany, the Ministry of Commerce said.

From January to July, the growth of FDI in the service sector outstripped other sectors, at 37.6 percent, compared with 4.58 percent for the manufacturing sector. Western China and the northeast registered FDI growth of 19 and 63 percent respectively.

Li believes FDI growth in the service sector is sustainable over the long-term.

In July, China's outbound direct investment recorded a high of $8.91 billion, the highest this year, said the ministry.

China was the second largest recipient of FDI worldwide last year, following the US. The United Nations Conference on Trade and Development predicted last month that the nation was on course to repeat the feat this year.

Executives from some leading German companies complained to Premier Wen Jiabao at a July meeting in Xi'an that foreign companies were required to transfer technology or did not receive equal treatment in government procurement.

Chen Deming, minister of commerce, said in an article later that foreign investors are always welcome.