Logo
  •  
  •  
  •  

European Voices on China
MERICS Blog

For China, it’s one step forward, two steps back on market access

21 September 2017

By Max J. Zenglein

With its recent promises of better market access for foreign companies, China tries to placate international criticism. But the steps are half-hearted at best, especially since the relaxations in some areas go hand in hand with new restrictions in others.

View of the Zhuoyue Qianhai Center and Huarun Qianhai Center, part of the Guangdong Pilot Free Trade Zone in Shenzhen. Image by Imaginechina

There is a reason why China is currently going out of its way to signal a relaxation of restrictions on foreign investment. And there is a reason why the international business community is not buying it. When the European Chamber of Commerce published its annual position paper this week, its president Mats Harborn spoke of “promise fatigue” and told reporters that member companies were not optimistic that the next leadership after the 19th Party Congress in October would match Xi Jinping’s anti-protectionism rhetoric at this year’s World Economic Forum in Davos with real actions.

The business leaders are right to be skeptical, even after the State Council issued a new circular just this month that orders China’s ministries to take steps towards further opening some of the sectors under their supervision for foreign investment. Circular 39 follows a series of other changes to China’s foreign direct investment regime earlier this year such as the reduction of the negative list that specifies which sectors are off limits for foreign investment, as well as an expansion of the number of free trade zones in the country.

All this activity shows that China is keenly aware of its ongoing need to attract foreign direct investment (FDI). After all, experimentation with FDI has been key for China’s development and a major catalyst for its rapid economic growth. At the same time, China has always been hesitant to open up sectors that it viewed as strategically important. This year’s steps have done little to genuinely improve market access for foreign companies, especially since the easing of restrictions in some areas went hand in hand with a further tightening in others.

It’s in China’s interest to signal openness

The recent changes are incremental, especially when compared to the size of the economy. And they were clearly the result of considerations of economic and political necessity.

First, China’s needs to acquire technology and knowledge to achieve its national targets for industrial upgrading. By lowering market entry hurdles in areas such as new-energy vehicles, shipbuilding or aircraft maintenance, China aims to attract key international players in the hope to increase domestic companies’ advanced manufacturing capabilities. Other measures such as easing visa restrictions for professionals or encouraging companies to set up regional headquarters in China serve the goal to attract technical and management knowhow.

Second, China wants to curb the redirection of investment flows to other countries. China remains a major investment destination, having attracted 118 billion USD in 2016. But in the first eight months of this year, foreign direct investment into China has cooled down. Since 2015 outbound investment by Chinese companies has been larger than investment inflows. This contributed to a rapid depletion of China’s foreign exchange reserves, which fell below 3 trillion USD this January, a psychologically important threshold for the Chinese leadership. China is trying to maintain a stable balance of inflows and outflows of capital to keep its currency stable. But steps to curb outbound investment by Chinese companies won’t be enough unless China can also continue to attract sufficient investment inflows.

Third, China sees the need to respond to increased political pressure by its major trading partners. Chinese investment in the EU and the United States has come under increasing political scrutiny, and the calls for China to create “reciprocity,” by improving international companies’ access to its vast domestic market, are getting louder. Chambers of Commerce of the EU and the United States have been complaining about a more difficult investment environment in China. Easing restrictions can be portrayed as a token of goodwill, emphasizing China’s intention of moving towards a more level playing field.

International companies still have a strong desire to engage within the rapidly transforming Chinese economy. The opportunity to participate in rapidly growing areas within China’s service sector as well as in other previously restricted industrial sectors is seen as highly attractive.

Relaxation is offset by restrictions in other areas

However, the latest efforts to improve the investment environment have been accompanied by a number of explicit or implicit restrictions that are bound to hamper operations of foreign companies in China.

First, vast areas of the economy remain off limits or highly restricted. Even the companies that are now invited to invest risk running up against China’s industrial policy targets. After all, the clearly stated goal within the Made in China 2025 strategy is to help Chinese competitors catch up and increase their domestic market share. It is reasonable to assume that when push comes to shove in any area of strategic interest, foreign companies will face discrimination.  

Second, stark government interventions in recent years underlined the Chinese leadership’s distrust of market-determined developments. This became apparent in tighter capital controls, which contributed to the increasing difficulties international companies had with repatriating profits since the end of 2016. Providing tax incentives for reinvesting profits within China, as the latest State Council circular does, as well as implementing tighter capital restrictions on repatriating profits also serve the goal of keeping capital in the country.

Moves like this one indicate that the government will be willing to backtrack on its promises as it deems necessary. It may seek further opening in the long run, but short-term market volatilities can always trigger the reintroduction of stricter regulations. 

Third, an overall more repressive environment amplifies the regulatory uncertainty for foreign investors. A crackdown on VPNs, NGOs or the disappearance of company executives are worrying developments. A new issue potentially unnerving foreign companies is the introduction of Communist Party committees within corporate governance structures. This has the potential to unnerve foreign investors in fear of losing control over operational decisions.

When considered in isolation, China’s recent steps would certainly indicate a welcome step towards reducing restrictions for foreign companies in China. But as long as such steps are complemented by more restrictive measures in other areas, they will not ease the foreign business community’s concerns. Overall, the investment environment is becoming less predictable in China.

  •  
  • 0 comments
  •  

Comment

The email address will not be published. Please fill all fields that are marked with *.

The  Mercator Institute for China Studies (MERICS)is a Stiftung Mercatorinitiative. Established in 2013, MERICS is a Berlin-based institute for contemporary and practical research into China.

Top