New
China FDI rules put focus on
ascent By Benjamin Shobert
Nervous eyes around the world have set
their gaze on China as 2012 gets off to a start.
Even without the looming leadership transition
planned for later this year, questions remain
about whether China's economy is on solid ground,
and how to interpret the direction of China's
economic reforms.
The direction of reforms
are viewed by many in Washington as an important
indicator not only of whether China will continue
opening its economy to foreign investment and
competition, but also as a
signal of Beijing's
willingness to let both economic and political
reforms advance. The prevailing notion of
engagement with China continues to be that
economic reforms will ultimately trigger political
ones, a linkage that has come under fire in recent
years.
The prevailing wisdom in Washington
is that much of the stalled political reform and
the heavy-handed suppression of dissenting voices
that have occurred over the last 18 months reflect
real concerns about the China's social stability,
both in general and more specifically in advance
of the change of leadership. This makes
interpreting Beijing's economic reform policies
that much more important.
Consequently,
the late December release of the 2011 revised
Catalog for Guidance for Foreign Investment by the
National Development and Reform Commission (NDRC)
sheds essential light on China's plans for further
economic reform.
Steven Dickinson, a
China-based lawyer and Principal at Harris &
Moure, a well-respected law firm with offices in
the United States and China, believes the 2011
Catalog reflects what he calls a "continued
openness" to outside investment. Perhaps more
importantly, Dickinson said the Catalog also shows
a desire on China's part to continue to open the
economy to outside investment and competition.
As he put it, "The basic numbers reflect
this. Three items were added to the encouraged
category, while seven items were removed from the
restricted category and one item was removed from
the prohibited category." He goes on that, "In
addition, where joint ventures are required, the
required Chinese share was reduced in eleven cases
and was not increased in any case."
These
moves are hardly consistent with the version of
China being popularized by some in Washington
policy circles. While the 2011 Catalog certainly
shows China continues to pursue a state-sponsored,
state-crafted and state-centric economic
development and planning model, it equally shows
that the country is systematically removing
barriers to outside participation in the domestic
economy. These moves stand in stark contrast with
other emerging economies, namely India, whose late
2011 moves to restrict FDI show what a stalled
process of economic reform really looks like.
Critics of this more generous
interpretation as to China's economic reform
process will be quick to point out that the 2011
Catalog does not have any impact on the country's
government procurement practices and the notorious
Indigenous Innovation policies that have drawn the
ire of various congressional committees, the
US-China Economic and Security Review Commission
(USCC) specifically.
This leaves open the
possibility that the 2011 Catalog and other facets
of Beijing's economic plans may run counter to
policies and practices of openness. As has always
been the case in the past, and will likely be the
case in the foreseeable future, certain
discontinuities are to be expected, which will
make local municipal-level interpretation and
engagement by foreign investors key to success.
Chris Devonshire Ellis, a Principal and
Founding Partner at Hong Kong based Dezan Shira
& Associates, agrees with Dickinson's
analysis. According to Ellis, "various new
products and technologies in the textile, chemical
and mechanical manufacturing industries have been
added to the encouraged category in the 2011
Catalogue." Beyond these sectors, Ellis emphasized
that the 2011 Catalog is, "more hi-tech focused."
The Catalog also puts additional emphasis
on China's service sector, with a focus that
includes "motor vehicle charging stations, venture
capital enterprises, intellectual property rights
services, marine oil pollution clean-up technical
services, [and] vocational skills training."
International investors focused on China's
exploding healthcare market will be pleased to
note that the 2011 Catalog encourages investment
in these areas. Specifically, as Ellis points out,
"Foreign-invested medical institutions have been
moved from the restricted to the permitted
category, while biotechnology, biomedicines, new
vaccines, and advanced medical equipment have all
been categorized as strategic sectors and
investments to be encouraged."
David Dai,
an attorney and Partner in Shanghai at MWE China
Law, echoed Ellis' view of what the 2011 Catalog
means for foreign investors in China's healthcare
market: "Foreign invested healthcare services are
removed from the restricted category and there is
no longer any restriction on foreign investment
proportion in this sector. The above
liberalization is applicable to the whole
health-care sector." China's willingness to allow
foreign investment in these areas is, as Ellis
points out, large a recognition of "the needs of
China's aging population demographics."
The 2011 Catalog does present a handful of
sectors where prohibitions either will be in kept
in place or expanded. According to Dai, restricted
areas include "large-scale agricultural products,
wholesale market and processing of rice and flour
are included in the restricted category. [In
addition,] sectors like domestic express delivery
business of mails and construction and operation
of villas are also added into the prohibited
category for the first time." Ellis adds that
"whole vehicle manufacturing has been removed from
the encouraged category, while to suppress over
production and redundant construction in certain
industries, poly-silicone and coal chemical
products have also been removed from the
encouraged category."
Beyond these areas
where Beijing is signaling it either wants more or
less foreign investment, the 2011 Catalog also
provides an insight into two other features that
characterize the challenges facing the country as
its economy evolves. As Dickinson puts it,
"Foreign investment is intended to support China's
manufacturing sector by providing access to modern
advanced technology.
There is no longer a
focus on job creation and there is little interest
in foreign investment in any sector outside those
areas which will help China modernize." This is an
important insight: while China recognizes the need
for its economy to grow, it no longer is chasing
shear job creation as the goal of inbound FDI.
Rather, it is seeking those technologies that will
enable it to move up the value chain and compete
internationally as something more than the world's
factory floor.
The second feature the 2011
Catalog offers beyond which sectors the government
desires investment within is the geography of
where it wants these investments to occur. Ellis
points out "investment is being further encouraged
geographically in the Central and Western regions
of China."
According to him, this reflects
awareness by the Chinese government of rising
wages along the eastern seaboard that drives a
"renewed interest in the more inland regions - as
long as China can get its cost of transportation
infrastructure right." Whether the lower costs in
these areas will offset increased transportation
expenses or the additional lead-time related to
moving in-land remain largely unknown.
The
2011 Catalog formerly goes into effect at the end
of January. The document cannot be understood or
interpreted without looking at other plans and
statements put forward by the Party, most
important of which is undoubtedly the
much-focused-on Five-Year Plan. However, the 2011
Catalog is the central planning document used by
the Chinese government to guide investment
decisions, and as such, it is important and
influential.
The Catalog's centrality to
Beijing's stated economic objectives should give
critics of China's economic reform process pause,
and advocates reason to believe that all is not
lost relative to China's liberalization. After
all, as Dickinson's comments show, the
overwhelming direction of China's foreign
investment is towards increased openness and
increased accommodation of foreign participation
in the Chinese economy. While there may well be
other reasons for concern over China's process of
reform, the 2011 Catalog makes an important
statement about the country's ongoing pursuit of
Western capital, ideas, and guidance.
Benjamin A Shobert is the
managing director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis
for companies looking to enter emerging economies.
He is the author of the upcoming book Blame
China and can be followed atwww.CrossTheRubiconBlog.com.
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