China still ranks high as a destination for multinational companies (MNCs) even as they cite increasing challenges such as higher labor cost and complexity of regulations, KPMG said in a report Wednesday.

The MNCs are still keen to invest in China's manufacturing and retailing as the country's 7-8 percent economic growth annually will create a large and growing source of revenue for them, the report said.

But the MNCs pointed out that global uncertainties and changes within China are making it "not easy" for them to benefit from the growth story.

"MNCs face difficult global conditions, not least the ongoing crisis in the eurozone, and also when China faces its own challenges, including the need to balance its economic model," said Peter Kung, a senior partner of KPMG.

The MNCs cited rising labor cost, inflation, insufficient funding to the private sector and the difficulties of expanding inland and in smaller cities as the main challenges.

They said conducting business in the inland is seen as "higher-cost, lower-yield and more fragmented."

One way they are adapting to the challenges is by forming joint ventures with local partners, or looking to diversify their business to other emerging markets, said the report, based on KPMG interviews with executives of MNCs including Asahi Glass, Tesco, FedEx and Jones Lang LaSalle.

It urged more government support to improve the economic structure, such as helping smaller manufacturers relocate further inland or spending more on education to foster innovation.