Happy Lunar New Year from the USC US-China Institute!
U.S. Department of State, "2015 Investment Climate Statement," May 2015
China maintains a more restrictive foreign investment regime than its major trading partners, including the United States. While China became the world’s top destination for foreign direct investment (FDI) in 2014, according to the United Nations Conference of Trade and Development (UNCTAD), broad sectors of the economy remain closed to foreign investors. China relies on an investment catalogue to encourage foreign investment in some sectors of the economy, while restricting or prohibiting it in many other industries. China’s investment approval regime appears designed to foster economic growth but may also shield inefficient or monopolistic Chinese enterprises from competition, particularly those China is trying to cultivate as market leaders. Foreign investors cite rising costs, difficulty in finding qualified human resources, market access limitations, and unclear and inconsistent enforcement of laws and regulations as significant challenges to establishing and operating businesses in China. More than half of the U.S. companies surveyed by AmCham China in 2014 believe foreign businesses are less welcome in China than before.
Over the past year, the Chinese central government announced a series of reforms and pledges that could lead to limited improvements in the overall investment climate, both from a market access and a regulatory standpoint if they were implemented. Major developments in 2014 include:
- China and the United States worked to narrow differences and reach agreement on the text of a high standard Bilateral Investment Treaty (BIT) that would encourage fairness, openness, and transparency. Both sides committed in November 2014 to continue to pursue the BIT as a top priority in their economic relations and to initiate negotiations over the “negative list” of exceptions to the agreement in early 2015.
- The Ministry of Commerce (MOFCOM) released a new draft Foreign Investment Law that would supersede the laws currently governing China’s FDI regime. The draft law appears to incorporate some key principles from the U.S. model BIT, including the use of a negative list to enumerate instances where FDI is treated less favorably than domestic investment. The draft would also streamline the approval process for foreign investment in some sectors; however, the proposed law also contains a number of troubling new provisions that could facilitate discriminatory treatment of foreign investors and their investments. The draft law was released for public comment in January 2015.
- In December, Premier Li Keqiang announced the establishment of three new Free Trade Zones (FTZs) in Tianjin, Guangdong and Fujian. The FTZs are expected to expand an investment registration regime established in the Shanghai FTZ, which is simpler than the approval process required throughout most of China, and open some previously closed sectors to foreign investment.
Although the Chinese Communist Party says it expects to “fulfill” its Third Plenum market-oriented economic reform agenda by 2020, a detailed reform roadmap and timetable is lacking for many sectors. Foreign investors remain concerned about discriminatory industrial policies, opaque and selectively enforced investment approval procedures, licensing barriers that favor domestic firms, and a lack of effective administrative and legal recourse if investments are restricted. Meanwhile, China’s revised Foreign Investment Catalogue, released in March 2015, fell short of meaningful progress toward broader market access for foreign investors. Poor enforcement of intellectual property rights (IPR), the forced transfer of technology, and systemic lack of rule of law are additional concerns. Over the past year, China released new policies to exclude foreign technology from various sectors, including: proposed banking sector guidelines that could disrupt supply chains and increase firms’ operating costs, a draft counter-terrorism law which imposes onerous requirements on foreign technology firms, and an intrusive national security mechanism that could be used to hinder or even block foreign investment.
The United States government has raised concerns about China’s investment restrictions and discriminatory policies at high levels, in bilateral fora such as the U.S.-China Joint Commission on Commerce and Trade (JCCT), and the U.S.-China Strategic and Economic Dialogue (S&ED). The United States Government emphasizes the need for China to open new sectors to foreign investment, increase transparency, and improve the enforcement of existing laws to protect investors’ rights.
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