Cautious optimism: A current outlook for foreign investment in China

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By Lindsay Thill

*A Starbucks with “Chinese characteristics” in Nanjing, China*
*Photo source: pymnts.com*

NANJING, China — With its growing middle class and population of 1.4 billion people, China has presented foreign companies with both an enticing market and an intimidating challenge for the last 40 years. While some companies such as Adidas, Starbucks and IKEA have found great success in the Chinese market, others have failed or decided to leave for a variety of reasons. Among these are extreme requirements imposed by the Chinese government, fierce competition from domestic Chinese competitors, lack of sufficient market understanding and concern regarding fair treatment and due process in the country.

At the China International Import Expo held this November, President Xi Jinping expressed his commitment to creating a “level playing field” for foreign companies in China, stressing that, “All countries should be committed to opening up and oppose protectionism and unilateralism in a clear-cut stand.” While this sentiment echoes statements made by Xi in recent years, it also strategically renews this commitment in a show of goodwill despite growing friction between China and the U.S., as well as other trade partners.

Furthermore, there is support on paper for these commitments. The 2015 revision of China’s Catalogue of Industries for Guiding Foreign Investment, which categorizes foreign investment in China by industry as “encouraged,” “restricted” or “prohibited,” reduced the number of industries restricted to foreigners by more than half. Just two years later, the 2017 revision exhibits a further reduction in the restrictions placed on foreign companies with 30 fewer restrictive measures across both the “prohibited” and “restricted” categories than were present in the 2015 revision.

While this appears to suggest that the Chinese market is becoming a more open and hospitable environment for foreign companies, it does not account for the manner in which policies are implemented. Those familiar with the enigma created by foreign investment regulations in China realize that the de jure foreign investment regulation does not necessarily align with the de facto manifestation of these regulations. At times, the policies intended to encourage fair competition inhibit the ability of foreign companies (and even domestic private companies competing with state-owned enterprises) to compete because the policies target certain companies while giving others leeway.

One example of this can be seen in China’s implementation of its anti-monopoly laws. The U.S.-China Business Council cites “a growing list of cases to argue that foreign companies are unfairly targeted due to Chinese protectionist or industrial policy concerns.” This can, however, be difficult to define as anti-monopoly investigations have been opened against both domestic companies, such as China Unicom and China Telecom, and foreign companies, such as Qualcomm, Microsoft, and BMW. Foreign companies’ concerns, therefore, come from a belief that procedures throughout such investigations are not consistent and fair. In this case, anti-monopoly investigations could be used to turn the tables in favor of domestic companies, thus enforcing views of a hostile environment for foreign companies in China.

A vocal critic of China’s unwelcoming environment for foreign companies in recent years and Germany’s Ambassador to China since 2013, Michael Clauss, stated, “It doesn’t matter which trading partner you talk to…there’s growing protectionism here.” He also noted that many companies interested in beginning production in China are “forced into going into a joint venture” and even frequently “asked to transfer technology, which is against the rules of the WTO.”

Such sentiments have been common within the international community, reflecting Beijing’s difficulty in convincing the world of the veracity of its claims regarding the openness of the Chinese market. Most recently, however, Clauss expressed an optimistic view of the situation. “We appreciate that China seems to be willing to show more flexibility on market access issues,” he said. “We expect that this will be finally followed by concrete measures.”

Should these “concrete measures” allow for the fair implementation of regulations and fair competition in the Chinese market, foreign companies’ trepidation toward entry may be assuaged. However, with the U.S.-China trade war and recent history of perceived protectionism in the Chinese market, foreign companies are wise to proceed cautiously. Though it is unclear whether foreign companies will, in fact, have access to a more hospitable Chinese market, they are, nevertheless, expected to continue entering the Chinese market whenever possible. Of course, with regard to China, it is often more effective to interpret a change in policy based on actions taken rather than claims made.

Lindsay Thill is an HNC Certificate ’19/SAIS MA ’20 student concentrating in China Studies.