URUMQI - European and US businesses led the inflow in 2012 of foreign capital into northwest China's Xinjiang, eyeing its abundant resources and proximity to central Asia, industry observers say.

Shanghai Volkswagen, German carmaker Volkswagen AG's joint venture in China, in December set up an auto workshop in Urumqi, capital of Xinjiang Uygur autonomous region, marking a step toward its plant there becoming operational next year with an annual output of 50,000 vehicles.

Hu Maoyuan, chairman of SAIC Motor Corp and Shanghai Volkswagen, said the company wants to explore the booming western China and central Asia markets.

Foreign direct investment (FDI) in Xinjiang reached $396 million in the first 11 months of this year, up 30.8 percent from a year earlier, according to the regional government's commerce bureau.

Overall, November saw FDI into China fall for the 10th time in 11 months, as labor costs rose and an economic slowdown dragged growth down for seven quarters in a row.

In the first 11 months of 2012, China attracted $100.02 billion in FDI, down 3.6 percent year on year, according to the Ministry of Commerce.

China has been encouraging investment in its relatively poor western region by offering favorable policies over the years.

The west's rate of economic development has been higher than that of the east for five consecutive years, according to Du Ying, a deputy head of the National Development and Reform Commission, the government's top economic planner.

"Xinjiang is striving to lay a good foundation for cooperation with the world's leading companies to advance businesses," said He Yiming, head of Xinjiang's commerce bureau. It provides an easy access to markets in the Eurasian heartland, with Russia, India, Pakistan, Mongolia and four other central Asian countries on a borderline extending 5,600 km.

With 17 State-level open ports, two international airports and extensive roads and railways linking with its neighbors to the west, the region has become the bridgehead in the country's fresh westward opening-up drive, He said.

"By setting up branches and factories nearer to consumer markets, foreign enterprises will save on transportation and labor costs, and master consumer psychology," said Meng Yongsheng, deputy dean of economics at the University of Finance and Economics in Xinjiang.

Covering about one-sixth of China's land mass, the remote and formerly backward border region of Xinjiang holds abundant resources such as oil, coal and natural gas. Pipelines transporting gas from central Asia enter China through Xinjiang.

Executives of global mining giant Rio Tinto visited Xinjiang in July to look for opportunities for cooperation. United States-based Peabody Energy is involved in the geological inspection of one of the region's largest integrated coalfields in order to advance an open-pit coal mine project that is expected to produce 50 million tonnes of coal every year.

He Yiming said the influx of foreign capital proves Xinjiang has finally built a competitive industrial base, improved government services, and established a much more convenient transportation network.

The foreign-invested projects will in turn accelerate the area's opening up, and upgrades in its industrial structure, the official added.

He said government support and favorable policies also ease foreign companies' settling. The region has added four state-level economic and technical development zones to its original 15 and a border economic cooperation zone.

The two special zones of Kashgar and Korgas set up at the end of 2011 provide favorable policies ranging from tax exemptions, subsidized electricity and transportation, to low-interest loans for infrastructure.