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Economy

Optimization of China’s Foreign Investment System Sends Strong Signal

Jun 27 , 2019
  • Zhang Monan

    Senior Fellow, China International Economic Exchanges Center

The new 2019 version of the Negative List for Foreign Investment and the Catalogue of Industries for Guiding Foreign Investment will be released in June. This is a strong signal that China will maintain global multilateralism and a system of free trade and investment, deepening the promotion of institutional openness at a time when globalization is encountering setbacks and challenges face the international economic order.

China has been open to the outside world for 40 years, and its open economic system has also developed: from openness in policy, openness now includes commodities and institutions. In recent years, the pace of globalization has suffered setbacks, and major changes have taken place internationally and domestically. How to adapt to shifting globalization, how to reform and improve policies to fit new international rules, and how to promote high-quality development have become major questions concerning the long-term development of China’s economy and society.

In March of this year, China issued a new Foreign Investment Law and decided to carry out domestic reforms based on the principle of competitive neutrality. These measures are an important step for China to carry out institutional openness. China is creating a system of economic and trade rules that is connected with international high standards, and establishing a business environment that promotes the development of the market economy, while forming a new pattern of comprehensive openness. Recently, a spokesperson for China’s National Development and Reform Commission stressed that in revising the negative list, the main goal is to streamline: “We won't add anything. We will only subtract from the list.” This means that a shorter list and greater openness will be the basic principles of the new 2019 negative list for foreign investment and the new catalogue of industries for guiding foreign investment.

In fact, the 2018 version of the negative list for foreign investment reduced the number of national items to 48 and the number of free trade pilot zone items to 45, comprehensively relaxing market access for primary, secondary, and tertiary industries — involving sectors such as finance, transportation, trade and commerce, professional services, manufacturing, infrastructure, energy, resources, and agriculture. The 2019 version of the list will further expand the scope for encouraging foreign investment while improving foreign investment industries and regional structures. Compared with the 2017 version of the list, which listed 35 items in the restricted category and 28 items in the prohibited category, the 2019 version will completely abolish the restricted and prohibited categories. In particular, the basic liberalization of manufacturing reflects China’s encouragement of foreign investment’s participation in China’s open economic system, as well as the upgrading of the global industrial chain, which will make foreign investments become highly localized and deepen their integration with the Chinese market.

History has proven that the more open a country’s market is, the more it will become a hub of global value. According to the latest World Investment Report by the United Nations Conference on Trade and Development, the trend of deglobalization has intensified. Against the backdrop of some major economies’ increased investment thresholds and barriers that have led to a global downturn in foreign direct investment, China has attracted foreign direct investment to oppose this trend. In 2018, capital flows into China reached $139 billion, making it the world’s second-largest recipient. The latest data from the Ministry of Commerce also shows that from January to May of this year, investments flowing into China from developed economies have grown significantly. Investments from Singapore, South Korea, Japan, the United States, and the United Kingdom increased by 33.9%, 66.9%, 5.1%, 16.3%, and 56.9%, respectively. With the acceleration of China’s comprehensive opening up and the continuous improvement of the business environment, China will continue to remain an attractive place for global investments.

However, in creating a more open institutional environment, China must protect its core interests from major threats using laws, rules, and norms. The escalation of China-US trade frictions and the development of high-tech competition have become serious threats to the global industrial chain and to supply chain security, with industrial security issues becoming increasingly prominent. Currently, in the United States, the Foreign Investment Risk Review Modernization Act of 2018 significantly expands the legal basis for the Foreign Investment Committee to review investments in three key areas: one, important industrial technologies, including artificial intelligence, robotics, nano, and microchip technologies; two, infrastructure, including port facilities and operations, energy and power production and distribution, roads and railways, communications systems, and data centers; and three, national security-related technologies and manufacturing, such as aerospace, remote sensing, and telecommunications hardware. At the same time, the United States has comprehensively revised its existing export control regulations and has strengthened its long-arm jurisdiction. President Donald Trump has signed the National Defense Authorization Act for fiscal year 2019, an important part of the Export Control Reform Act, which increases restrictions on foreign holding companies, especially Chinese companies, increases export controls on emerging and basic technologies, and establishes an inter-departmental consultation mechanism to improve law enforcement capabilities. In the medium and long term, China-US science and technology competition has just begun. While promoting open industry and the opening of its market, China also needs to accelerate the improvement of its national security system under the framework of the foreign investment negative list system and the industry guidance catalogue.

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