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Is China’s Investment Climate Worsening?

Dec 05, 2023
  • Zhou Xiaoming

    Former Deputy Permanent Representative of China’s Mission to the UN Office in Geneva

These days, stories about a “worsening” investment climate in China are swirling in the West. Washington and Brussels rail against its alleged practice that tilt the level playing field of trade while Western mainstream media claim that China intends to invoke the catch-all provision in its anti-espionage law to cast a wide net to identify spies.

Meanwhile, some foreign investors complain about the challenges they face in China. I heard the European Union’s ambassador to China telling an audience at a roundtable in Beijing in September that a report released by the EU Chamber of Commerce in China listed more than 1,000 recommendations for the Chinese government on improving the investment environment.

To be fair, the Chinese government has been hard at work to improve things for foreign companies. The transformation of Hainan province into a free trade port 60 times the area of Singapore is going full tilt. The China International Import Expo, the only one of its kind in the world aimed at boosting imports to China, has been held annually for the last four years despite the COVID-19 epidemic. Its recent session in November attracted nearly 3,500 companies from more than 120 countries to showcase their products and services, with deals valued at $78 billion. Further, market access has been improved. All restrictions on foreign investment in the manufacturing sector have now been removed, and the financial services sector is being opened at an accelerated pace.

As an indication of the improvement in its operating environment, China scored 77.9 in 2022 in the ease of doing business as ranked by the World Bank, compared with 77.9 for Spain, 78 for Japan and 78.7 for Austria. As a result, it was ranked 31st in 2023, up from 46th one year ago.

Sure, there remains much to be desired in China’s investment climate. Chinese leaders have listened to foreign investors, and are moving quickly to address their concerns, convinced that the future of the country lies in its high-level opening-up. In August, the State Council, China’s cabinet, announced a series of policy measures, such as improving market access in services, upgrading the mechanism for protecting the interests of foreign investors, including intellectual property, and securing the participation of foreign invested companies in government procurement and the setting of standards. More important, in what may be called systemic convergence, China aims to develop a fundamental system and regulatory regime in international trade and investment that is in alignment with global best practices in rules, regulations, management and standards.

Nevertheless, the difficulty and frustration of foreign investors operating in China is real. For decades since the late 1980’s, foreign companies were king, enjoying an unrivaled position in the Chinese market. Foreign brands, considered superior to local products, often commanded a big price premium. With the rise of China Inco, however, foreign investors are facing fierce competition from leading indigenous companies.

They increasingly find tough going, although the great majority of European and American companies are profitable. The last few years have seen foreign brands squeezed, or even beaten, not just in consumer goods sectors such as home alliances but also in capital goods sectors such as telecommunications equipment, engineering machinery and LEDs. In automobiles, for example, roughly a decade ago foreign brands dominated China’s market. With EVs, however, local brands have replaced foreign ones in terms of market share and have begun to make inroads in overseas markets. As a result, China is likely to overtake Japan as the world’s No. 1 car exporter in 2023, according to Germany’s Center of Automotive Management.

In China's highly competitive environment, only the fittest of foreign companies will survive and grow. As these companies expand their operations to capitalize on the opportunities provided by the country’s development, a significant number of foreign investors have also been forced to pack up and quit the market. Starbucks, with 6,500 shops under its belt in China, is opening a new shop every nine hours, and plans to open 9,000 shops by 2025, which will account for more than one-fourth of its shops worldwide. At the same time, Carrefour has languished, closing down one supermarket after another in recent years. 

The change of fortune for foreign investors results largely from the dynamics of competition. Many foreign investors have lost their competitive edge in the Chinese market because of their lack of innovation, a fact that few multinationals will admit publicly. China, once a net technology importer, is now a major technology exporter. And it leads the world in the number of patent applications in 5G, 6G and AI. This is because China invests more in R&D than the 27 countries combined in the EU, and a larger share of its gross national product than both the EU bloc and the United States. To be successful in China, foreign investors would be well-advised to focus on striving to increase their competitiveness.

The U.S. and the EU’s criticism of China for not having a level playing field, on the other hand, smacks of double standards when Washington and Brussels continue to discriminate against Chinese companies in their territories. In contrast to Beijing’s embrace of foreign investment in the high-tech sector, they view Chinese investment in semiconductors, AI, quantum computing, biotechnology and whatever they deem as critical infrastructure as Trojan horses to be curbed on grounds of national security.  As a result, Chinese investment in the U.S. plunged to $7.9 billion in 2022 from $46 billion in 2016. Meanwhile, the FDI flow to the EU from China plummeted to 7.9 billion euros in 2022 from 47.4 billion euros in 2016, the lowest level since 2013, according to the Mercator Institute for China Studies.

At the same time, the West’s concerns over China’s anti-espionage and data-security laws appears to be overblown. Just about half a dozen individuals in a land with more than 1.4 billion inhabitants have been apprehended, allegedly, since the law went into effect in April.

In addition, Washington’s accusation of technological theft by China is far from tenable. During his term, President Donald Trump accused Huawei of stealing America’s 5G technology, which the U.S. has yet to develop even now. In September, the White House spokesperson said Huawei’s production of semiconductors using its own technology was illegal.

Apparently, the efforts by Washington and Brussels to paint a bleak picture of China’s investment climate are politically driven. They are intended, analysts say, to keep foreign investors away from China, especially its high-tech sector, in an effort to decouple. This helps explain a paradox: The more effort China puts out to open up to the outside world, the darker the picture of the country’s investment climate is painted by Washington and Brussels, and more demands are placed on China. Against this geopolitical backdrop, it would be highly unrealistic to expect Washington and Brussels to be impressed, no matter how hard China tries to improve its investment climate.

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