China’s policy paradox
An analysis of the conflicting messages Beijing is creating regarding foreign firms operating within China's borders.
- The Chinese government’s reformist agenda is highlighting continued opening up to foreign investment.
- China’s intensified crackdown on internet activities is also making life harder for many foreign businesses.
- China's support of the role of markets and deepened integration into international markets will most likely continue.
By Geoff Raby.
At the end of China’s annual “twin” political sessions – the National People’s Congress and the Chinese People’s Political Consultative Conference – observers have been left with two conflicting messages.
While foreign firms are suggesting that it is becoming more difficult to operate in China, the government’s reformist agenda is highlighting continued opening up to foreign investment.
On one hand, a recently released report by the American Chamber of Commerce in Shanghai showed that a historically low share of firms are “optimistic” about the prospects of doing business in China. This belief is based on a number of factors.
Apart from the slowdown of the economy, companies are concerned about the risk of being targeted by President Xi Jinping’s anti-corruption campaign and stepped-up anti-monopoly drive. Foreign businesses feel that anti-graft investigations especially target foreign firms. Moreover, when penalised under anti-monopoly regulations foreign firms face unreasonably high fines: for example, Qualcomm’s fines of US$975 million in a recent anti-monopoly case.
Cracking down on online activities
China’s intensified crackdown on internet activities is also making life harder for many foreign businesses. Restrictions have recently been raised on private networks that surpass government censorship with Google services harder to access or considerably slowed down.
Further complaints include an opaque regulatory environment, rising domestic competition, and plans to introduce a counter-terrorism law that will require technology firms to hand over encryption keys and install security backdoors.
Altogether, there is a growing sense that foreign firms are “less welcome” than before to do business in China and some are convinced that the golden age for multinationals in China is over.At the same time, the message emerging from the parliamentary “twin sessions” is one of bold reform and embracing increasing foreign investment. The government’s broad aim is to shift China’s economy away from manufacturing and investment dependency towards consumption-led growth, spurred by a growing role played by the private sector, technological innovation and increased integration into international markets.
The growth model, described as the “new normal”, is meant to take China on a continued path of modernisation and sustainable economic expansion.
The government work report lists a range of reforms with the objective of reducing administrative burdens and improving the functioning of internal markets. This involves simplifying processes for capital registration, administration of business licenses and improving the credit rating system.
Market access for private investment will be considerably relaxed and the number of categories of goods and services with controlled pricing are to be reduced. Reform of the financial sector involves encouraging the establishment of private institutions and a gradual opening of the capital account. SOEs are to be encouraged to shift towards mixed ownership and so is non-state capital investment into public projects.
Pushing for greater transparency
To create greater transparency, government departments will be required to make their budgets publicly accessible. Of even greater relevance to foreign businesses are the plans to revise the guidelines for foreign investment. The government aims to remove the complicated approval procedures for FDI and replace these with a “negative list” applying only to a limited number of industries.
A negative list means that everything is open to foreign investment except those that have been explicitly excluded. In total, the number of restricted industries will be halved through this measure, constituting a radical removal of red tape.
The government also aims to allow the RMB exchange rate to float more freely and become more easily convertible. Free trade zones are to be introduced in Shanghai, Guangdong, Tianjin, and Fujian along with the establishment of the Shenzhen-Hong Kong Stock Connect.
The government also aims to allow the RMB exchange rate to float more freely and become more easily convertible.
It may seem contradictory for the Chinese government to narrow the freedom of foreign firms operating on the Chinese mainland, while at the same time supporting a shift towards a more liberalised and open economy. However, the clampdown on corruption and free information are part of Xi Jinping’s continued consolidation of power. These steps are taken as part of the president’s strategy of a determined political leader – realising deep economic reform is necessary to uphold the country’s continued development, which is also required for the leadership to uphold its political legitimacy.
The government’s support of the role of markets and deepened integration into international markets will therefore most likely continue in parallel with strong political control. If many of the policy suggestions of the recent work report are in fact realised, the balance may be in favour of an improved business environment in China.
Geoff Raby is a former Australian diplomat and CEO of Beijing-based advisory firm Geoff Raby and Associates.
This article was first published in the May 2015 issue of Acuity magazine.
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