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Does Foreign Investment Really Encounter China’s “Protectionism”?

Mar 09 , 2015
  • Zhang Monan

    Senior Fellow, China Int'l Economic Exchanges Center

There is international concern that China’s ongoing antitrust investigations and the drafting of a new Foreign Investment Law (an exposure draft), mean a higher threshold for foreign investment and “investment protectionism.” Is China really going to close the investment door?

On the whole, the opinion that China is practicing “investment protectionism” is not supported by figures at all. According to the cross-border direct investment statistics from United Nations Conference on Trade and Development, China has absorbed foreign investment the most for 22 consecutive years since 1992, among developing countries. Even during the period from 2008 to 2014 after the financial crisis, China approved more than 20,000 foreign-funded enterprises every year. Affected by the international economic situation, the utilized foreign investment fluctuated, but still rose on the whole, increasing from $92.4 billion USD in 2008 to $119.56 billion USD in 2014.

In fact, it was when China opened to the outside world that China’s economy participated and comprehensively integrated with the globalizing world. Foreign capital is an important part in China’s economic development and China has held an active and open attitude toward foreign capital. However, in recent years, with the change of international economic and trade patterns and China’s need to transform and restructure its economy, China will inevitably adjust its foreign investment and investment laws. This has been proven by facts.

To protect resources and the environment, foreign direct investments in heavy polluting, high-energy-consuming, and overcapacity-burdened industries are restricted. To resolve the issue of unfair distribution, employees’ labor protection and minimum wages, etc, are greatly enhanced. Special attention is paid to the relative stability, continuity and operability of foreign investment laws and regulations. To perfect market economic systems and let the enterprises compete in a fair and regulated market environment, “super-national treatment” must gradually be abolished. In fact, many countries do not normalize “super-national treatment.” Each country adjusts their foreign investment policy in accordance with its own economic situation and new stages of economic development, turning from “super-national treatment” to “national treatment.”

Since the global financial crisis in 2008, global trade has been severely adjusted, giving rise to a new tendency of advocating “fair trade” instead of “free trade.” The world has given attention to such issues as “pre-entry national treatment,” competitive neutrality of the state-owned enterprises, negative management lists, and fair market competition. These issues create greatly challenge China’s systems of domestic law and market environments; China needs to adapt to this new tendency through further reform.

After the third plenary session of the eleventh party central committee, Chinese new government deregulated the entry of foreign capital, changing the administrative system of examination and approval into a filing administration for the foreign direct investment items, contracts and articles. They also integrated a “negative list” system. In 2014, based on the State Council’s measures of relatively expanding openness, the negative list was revised and adjusted to the special administrative measures for foreign investment entry into 139 articles, a 26.8% adjustment. Data tell that 91.3% of the new foreign-invested enterprises in the Shanghai Free Trade Zone were established through filing administration, greatly enhancing government transparency and convenience.

Recently, concerning foreign investment, the Ministry of Commerce is drafting a new Foreign Investment Law. It is expected to combine the Company Law and three foreign investment laws (Law on Foreign-Capital Enterprises, Law on Sino-Foreign Equity Joint Ventures and Law on Sino-Foreign Cooperative Joint Ventures).”Three into One” and the draft of a uniformed Foreign Investment Law will more facilitate the gradual uniformity of the laws and regulations on domestic and foreign investments, promote the uniformity of entry systems and bring China in line with the internationally prevailing rules comprehensively.

Only by following this trend can we march forward. Just like China’s economy, which is undergoing a deep restructuring, foreign investment is at a new historical node, still under mutual selection and integration. China’s economy has relied on the effect of low investment costs formed by demographic dividends, at the cost of land and the environment. Presently, this effect gradually diminishes. It is difficult for China’s economy to sustain a growth model that excessively relies on increasing production factors like labor and capital, etc. There should be investments in human resources, technological advances, innovation, and development. China has changed its choice of foreign investments, needing more foreign investments in those newly growing areas. For example, the newly revised Catalog of Industries for Foreign Investment is encouraging new investments in items such as the key components of new clean-energy vehicles and the next generation of internet system device based on IPv6. Some far-sighted multinational companies are also actively making use of the new rules, seizing the opportunity of China’s structural transformation and beginning to make active arrangements in the strategic newly emerging industries and the high-end service industry.

According to the data of China Ministry of Commerce, the foreign capital in Chinese service sectors reached $66.3 billion USD, up by 7.8 percent over the same period, accounting for 56 percent of the total. In contrast, traditional industry dropped by 12.3 percent due to the rising cost of human resources and environmental factors.

At present, nearly half of the global value-added exports came from the service sector. 60 percent of the total global direct investment stock has flown into the service sector. The service factor has become a key element in interest distribution of the global value chain. To this end, the Chinese government will further deregulate the entry of foreign investment, promote investment liberalization and openness in the modern service sectors, and support a further use of foreign investment in livelihood services. The door for foreign investment entry will be further open and more high-level foreign production sectors will be attracted to China.

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