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A New Foreign Investment Regime for a New Era of Socialist Modernization

Mar 08, 2019
  • Sourabh Gupta

    Senior Fellow, Institute for China-America Studies

Something significant is stirring within the policy framework of China’s foreign inward investment regime. Unmistakable signs have been evident over the past 12 months.

Last April, a week after President Xi Jinping declared that China would be a vanguard protector of globalization and pledged a new round of opening-up and reform at the Boao Forum for Asia, Beijing relaxed its equity joint venture requirements in the automotive sector. Foreign equity caps on the manufacture of electric vehicles were eliminated on December 31st and on all automotive ventures are to be phased out by 2022. At the Boao Forum in April of 2018, People’s Bank governor Yi Gang also laid out a precise time-table to expand foreign ownership in securities, fund management, futures, and life insurance to 51 per cent by the end of 2018.  The insurer, Chubb Ltd., was recently cleared to raise the stake in its converted Sino-foreign equity joint venture above the crucial 50 per cent threshold.  

At the end of June, China unveiled a trimmed negative list for foreign investment, introducing new opening-up measures in 22 sectors. Some of these openings, such as in seeds, railway networks, power grids, and aircraft manufacturing, were ones that the government had, hitherto, been reluctant to open. This January, BT Group PLC became the first international telecoms company to be granted permission to provide direct services to business customers in China. Also, in January, S&P Global Inc. became the first of the international credit rating majors to win approval to establish a wholly-owned subsidiary in Beijing – fulfilling a promise made in May 2017 as part of the U.S.-China Comprehensive Economic Dialogue’s 100-Day Action Plan. A number of U.S. biotechnology product applications stemming from that Action Plan were also recently approved by Chinese regulators.

Later next week, China’s foreign inward investment regime will witness a great leap forward with the fast-tracked passage of a streamlined and liberal foreign investment law at the final plenary of the on-going ‘Two Sessions’ meetings. The tightly-worded, six-chapter draft is to serve as a Basic Law, repealing the three existing foreign investment laws (the Wholly Foreign-Owned Enterprises Law; the Chinese-Foreign Equity Joint Ventures Law; the Chinese-Foreign Contractual Joint Ventures Law). Once legislated, the law will fully redeem President Xi’s pledge at the 19th National Party Congress in October 2017 to adopt “a system of pre-establishment national treatment plus a negative list across the board … and protect the legitimate rights and interests of foreign investors.” Similarly, as part of the 90-day trade truce talks, the foreign investment law will substantially redeem China’s pledge to the U.S. to treat all businesses registered in China  – including foreign-owned businesses – equally.

As written, the penultimate draft categorically spells out the meaning of “pre-establishment national treatment” as affording foreign investors treatment that is no less favorable than that afforded to Chinese investors during the establishment, acquisition, expansion and other stages of their investment. National treatment is to be afforded to all foreign investment outside of the negative list. The law’s investment protection clauses specifically prohibit forced technology transfer by administrative measures and require the conditions for technological cooperation to be determined solely through consultation among businesses concerned on the basis of fairness and equality. Various levels of local people’s governments are obliged to strictly abide by the central government’s rules and must not set market access or exit conditions, and must not interfere with the normal business activities of foreign-invested enterprises. A working mechanism to address complaints by foreign businesses, too, is envisaged. In this regard, the authorities would do well to contemplate establishing an ombudspersons desk within the Vice-Premier’s office or within the Commerce Ministry to swiftly deal with such complaints. This enforcement-minded foreign investment law follows on the heels of the inauguration of a national appeals court within the Supreme Court to swiftly deal with intellectual property (IP) rights cases.

Four decades after Deng Xiaoping had initiated a great journey of reform and opening-up, the reform of China’s foreign inward investment regime can be traced to the imperatives of a new era of socialist modernization – one that qualitatively aims to transition the economy to a more sophisticated and productivity-led growth model. With the anti-corruption campaign having netted ‘tigers and flies’ alike, and with government fundamentally re-organized and streamlined to implement the challenges of this ‘new historical starting point’, President Xi now stands at the pinnacle of his political power to push through another multi-decade-long era of foreign and domestic economic policy liberalization. The salutary timing of Donald Trump’s pressure on China to reform, too, should not be discounted

Deng’s visionary liberalization of China’s trading regime irrevocably altered the course of global manufacturing in light and medium technology-intensive industries – and China’s role therein. So also, President Xi’s liberalization of China’s investment regime embodies the potential to transform China into the advanced manufacturing workshop of the world. For this to be fully the case though, China must continue to pare down its negative list, widen investment market access to OECD standards, and confront the day-to-day obstructions that foreign and local businesses face in the shape of ‘glass doors’ of policy without regulation, ‘swing doors’ of hard and fast rules, and ‘revolving doors’ of added rules for would-be entrants.

China is a significant exporter of capital in its own right, with a growing taste for overseas mergers and acquisitions in the high-technology manufacturing space. In keeping with this evolving role, China should champion the establishment of meaningful disciplines at the multilateral level in the form of a WTO Agreement on Investment. Its active role in Geneva to pursue structured discussions leading to the creation of a multilateral framework on investment facilitation is a good start. “That international trade should be abundant, that it should be multilateral, that it should be non-discriminatory” was the widely-expressed sentiment at the Preparatory Committee gathered in October 1946 to frame the charter for the post-war global trading order. China must endeavor to inscribe this sentiment as the guiding principles of the 21st century global investment order, too. 

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