Contribution by Eléonore Sayar,
3rd-year student in ESSCA’s Bachelor of International Business Development,
currently completing a professional internship in Shanghai.
The Power of Globalisation
It is no surprise that international superpowers invest around the world. Thanks to globalisation, we can find a Mac-Donald’s, a Burger King or a Subway in almost all countries, even the poorest ones. Who would have imagined that one day there would be an American fast-food chain near the Great Wall, one of the ancient wonders of the world.
The reforms of Deng Xiao Ping date from the late 1980s, and no one was predicting the incredible speed of China’s economic growth. Today, as the world’s second largest power, China is taking its revenge by demonstrating to the world its economic, technological and cultural wealth, including its soft power strategy, its ” ability to seduce and attract” (as defined by the American geopolitologist Joseph Nye in 1990). As we can see on TV and read in the newspapers, China is everywhere, but its presence is also a problem for other countries in the world, especially concerning China’s significant investment on all continents.
In 2016, foreign investment by Chinese companies had reached record highs, making the country the second largest global investor behind the United States, according to UNCTAD. You can imagine the Chinese threat to the dominant power, the United States, who, naturally, wants to keep their first place, but also for the economic stability of European Union.
Many foreign companies choose to invest in China because of the great potential of its further development. With the number of inhabitants largely exceeding one billion, China has indeed a huge number of potential customers. The middle class in China is also growing and getting richer over time. In 2017, the fortune of China’s 373 billionaires increased by 39%.
The geographical context of the Asian giant is very advantageous for the country, since it has a seafront as well as a proximity with different emerging Asian countries. In purchasing power parity, China is the world’s leading economy. Payroll costs in China are still relatively low compared to European or American countries. As a result, there are many good reasons for foreigners to invest in China. BUT there are several laws on foreign investment in China.
How difficult is it to invest in China?
The Chinese government imposes quite a few restrictions on foreign investment. However, there is a sector where foreign investment is even formally prohibited, it is state-owned enterprises.
The Chinese government suggests and motivates investment in high-tech sectors, the sector of production of materials or equipment, the service sector and the sector of renewable energies. In other words, the country encourages foreigners to invest in industries that require resources that China has abundantly, especially in the manufacturing sectors.
The Chinese government published in June 2017 the following catalogue: “Catalogue of Industries for Guiding Foreign Investment (Revision 2017)”. As its name suggests, it is a catalog which guides those who wish to invest in China and show them the different industries and those that are also profitable for foreigners to support a particular sector in China. Complicated to invest freely, you might say…
In a country where control by the Communst Party is absolute, it is not surprising to find this kind of restriction. The catalog lists different sections as “Special Management Measures for Foreign Investment Access”, “Restricted Industries for Foreign Investment” or “Prohibited Industries for Foreign Investment.”
As regards the protection of foreign investors, the Chinese government has put in place the bilateral investment conventions. The country is also a signatory to the MIGA (Multilateral Investment Guarantee Agency) Convention, an affiliated institution of the World Bank Group, with the mission to promote the flow of foreign investment in countries with emerging economies.
Several procedures are required for foreign invitations. It is first and foremost important to submit your business plan and all the work and motivations that drive this investment from a foreign player (with different laws in different sectors).
For a foreign investment who wants to participate in the capital of a local Chinese company, it should be necessary to learn about the sector. But generally, a foreigner will never own more than 49% of the capital of a Chinese company. It will always remain mostly Chinese. A cautious country? For Sure!
Before making the investment, the project is subject to verification and approval by the National Development and Reform Commission (NDRC) or provincial or local development and reform commissions, depending on the sector and the amount of the investment.
Once the project is approved, it is appropriate for the actor who wishes to realise the investment to declare the investment with the relevant organisms, namely NDRC, MOFCOM, or SAIC. It is mandatory for all projects to submit a business plan to obtain approval from the various competent authorities.
The Chinese government maintains absolute control over sectors such as aviation, coal, defense, electric power and the public grid, petroleum and petrochemicals, shipping, and telecommunications. And relative control on automotive, chemistry, construction, exploration and design, electronic information, equipment manufacturing, iron and steel, non-ferrous metals, and science and technology.
All these restrictions can frighten some business people or attract the craziest individuals who are not afraid of all the complexity of the administration and seize a great opportunity. But for how long?
Shifting towards reciprocity?
Trade relations are moving. Today, China, with its own strong investments around the globe, is increasingly facing some major problems. Other great trading blocks request reciprocity, particularly its main competitor the United States, but also the European Union. After some tensions, President Trump decided to limit the Asian giant’s investments. In addition, the American president has even decided to start what is called “a trade war” against China by introducing customs duties. Obviously, this is not without triggering action from China, which is also introducing taxes against USA.
Concerning the European Union, member-states are questioning the effectiveness of Europe’s China strategy. Having China invest in Europe without giving to the European countries the opportunity to invest freely in their country is one of the problems. There is therefore no reciprocity between these two actors as required by Europe. Moreover, after what happened in Sri Lanka (China took over the port of Hambantota for 99 years), some see Chinese investment strategies as real traps for the most vulnerable countries.
A trade war is, as many observers have said, not in the interest of anybody. One of the factors at stake is the investment laws in China. If the Chinese government is not willing to adapt them in a reciprocal manner, it is likely to face more and more restrictions in Europe and the US for Chinese investments. It will be interesting to see how the government of Xi Jinping will move on the issue of reciprocity.