China push to get FDI on track

The world’s second-largest economy has taken steps to boost investment from overseas in an apparent bid to make its markets more accessible to foreign players.

China is to open up closed segments of its economy, including public transport, to foreign investors. Qilai Shen / Bloomberg

China recently announced a series of market-opening measures in an attempt to regain its position as the world’s hottest investment destination after it fell behind India in 2015.

The decision comes ahead of the US presidency of Donald Trump who has promised to take action against Chinese businesses that he sees as negatively affecting domestic trade.

Two decisions taken by Beijing stand out: foreign companies will be allowed to launch initial public offers on the Chinese stock market, the National Development Reforms Commission (NDRC) says; and hitherto closed segments of the economy such as public transport, railway equipment, electric vehicle batteries and lithium mining will also be opened up to foreign investors.

The NDRC has also slashed the number of restrictions on foreign investors. Foreign companies will now be subject to the same review procedures as domestic firms in applying for business licences.

The government has also promised to abolish the existing system of minimum registered capital requirement for foreign investment. Overseas companies will now be subject to the same registered capital system as domestic businesses, says Tang Wenhong, the director general of the commerce ministry’s foreign investment administration department.

“Central government branches also need to conduct fair competition reviews when they make policies regarding foreign direct investment,” Mr Tang says. “Global companies’ intellectual property rights will be strictly protected.”

Ning Jizhe, the vice minister of the NDRC, says: “The access of foreign investment in financial service industries, including banking, securities, insurance and futures trading, will be further relaxed.”

As well as IPOs, foreign companies will be encouraged to issue bonds and broaden their financing channels, which is one of the demands of international lobby organisations such as the American Chamber of Commerce in China and the European Chamber of Commerce. There are signs China will soon increase the quota of investments allowed under the Qualified Foreign Institutional Investors (QFII) programme. At present, 278 overseas investors from 18 countries have availed of the facility, committing to bring in US$87.3 billion to the capital market.

China is also contemplating opening up some “sensitive sectors” such as telecommunications, internet and education, Mr Ning says. Analysts, however, question whether the new measures will successfully address the main concerns of foreign investors and result in a significant increase in FDI inflows.

"I think China has only superficially opened up more sectors to foreign investment," Scott Kennedy, the director of the Project on Chinese Business and Political Economy at the Centre for Strategic and International Studies in Washington tells The National. He says foreign companies will still face a number of hurdles at the implementation stage of new projects and during their operation.

“The broader environment is still highly restrictive, with wide swathes of the economy either off limits to foreign investors, or with ownership caps that require foreign investors to engage in joint ventures with Chinese partners,” Mr Kennedy says.

Jake Parker, the vice president of the US-China Business Council, also sounds less than enthusiastic. “Although some of the limited revisions are welcomed by some of our members, the number of openings falls far short of what would be necessary to reinvigorate diminishing foreign industry confidence in the China market,” he says.

NDRC says it has taken the market opening steps because it wants to “improve transparency of policymaking”. It also wants to “let foreign capital play a positive role in China’s economic development, industry transformation, and reform and innovation”.

But analysts say China has in fact taken these steps as part of its effort to fight two battles at the international level; it wants to persuade the World Trade Organisation to declare China a market economy, and it wants to try to mitigate any aggressive trade moves by Mr Trump, by showing that China offers a level playing field to foreign investors.

Beijing is facing stiff resistance from the United States and, to a lesser extent, the European Union, in its efforts to obtain market economy status at the WTO. Chinese officials have said Beijing should automatically get the status after 15 years as a WTO member, a milestone it marked last year.

To try to ensure better implementation of its strategies, the central government has also moved to prohibit provincial and municipal governments taking “arbitrary decisions” that restrict foreign investment in their areas. Foreign lobby organisations have often complained that local governments create roadblocks, making it difficult for overseas investors to take advantage of concessions granted by the central government in Beijing.

China lost its position as the world’s biggest overseas investment destination in 2015 after its FDI flows fell by 23 per cent to $56.6bn. It was replaced by India, which surged ahead by attracting $6bn more than China did.

“The big FDI story is India. After a long period of trailing behind China, the south Asian country is now racing past its formidable rival,” says Courtney Fingar, the head of content at London-based fDi Intelligence.

“India was the highest ranked country by capital investment in 2015, with $63bn worth of FDI projects announced.”

China’s bureau of statistics says the country’s FDI inflows slackened further last year.

Although it will be a while before final numbers are available from India, analysts question if it has managed to retain the top slot as the last two months of the year saw its economy hit by the government’s move to ban some higher-value banknotes.

The economy will take months to recover making it difficult for India to repeat its 2015 FDI performance this year, many analysts predict.

Even before the Trump administration takes charge, China is facing mounting resistance from Washington. The outgoing US president Barack Obama recently blocked a Chinese company’s purchase of the German chip equipment manufacturer Aixtron on national security grounds.

“US-China commercial relations are in for a rough ride in the coming months, as the Trump administration aggressively pushes China to open its markets further to American imports and investment, and applies a more critical eye to Chinese investment in the United States,” Mr Kennedy says. “This is likely to induce countermeasures from China and, as a result, two-way trade and investment flows could very well fall substantially.”

Mr Trump recently named the harsh China critic Peter Navarro as the head of the White House-based National Trade Council to advise him on trade policy. Chinese media say this is a sign Mr Trump is preparing to follow through on campaign promises to take action against Chinese trade and investments at home. Some Chinese experts have publicly urged Beijing to retaliate against any adversarial moves from Washington.

However, this would reverse a trend in the opposite direction. China recently issued measures designed to attract foreign investment, technology, practical management methods and human resources to national development strategies, including the “Made in China 2025” strategy; a western development programme; the Yangtze River Economic Belt; and the 13th Five-Year Plan (2016-20) for revitalising north-east China.

China has so far attracted $1.76 trillion in foreign direct investment in three decades up until the end of November, mainly from the US, European Union, Japan and South Korea.

The government has also decided to remove hurdles in a number of manufacturing sectors including motorbikes, rail transport and ethanol fuels. Foreign capital will also have access to the water conservation sector, energy and environmental protection and utilities through franchise agreements.

“In a move to enhance the country’s ability to develop, foreign investment has been encouraged to enter high-end manufacturing industries, as well as services related to manufacturing, such as modern logistics and industrial design,” says Li Gang, the vice-president of the Chinese academy of international trade and economic cooperation in Beijing.

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