China’s new commerce minister vows to relax FDI restrictions

China’s new commerce minister, Zhong Shan, has put increasing foreign direct investment (FDI) attractiveness high up on his agenda, since he was named for the post on February 24 by president Xi Jinping.

Mr Zhong declared his intentions to remove restrictions against foreign companies and expand free trade zones (FTZs) as a way to attract further FDI, at a meeting with policymakers in Beijing in late February, just before the National People’s Congress, according to a report on the People’s Republic of China (PRC) State Council website.

Reforms suggested

Specifically, Mr Zhong has argued for further supply-side reform. This includes reducing restrictions against previously banned foreign enterprises, such as healthcare and educational businesses, which are referred to as “experiments” by the PRC.

“A total of 114 innovative ways to get things done have been duplicated as a result of experiments that have taken place in the country’s four FTZs, including Shanghai and Guangdong,” said Mr Zhong in the State Council report.

Regardless of a slowing economy, China remains a hotspot for FDI. In 2016, foreign investors poured a record $139bn into the economy, up by 2.3% from a year earlier, according to figures from UN trade and development body Unctad. However, despite this success, which largely piggybacks on the stellar economic growth the country experienced in the last decade, China still ranks second (to the Philippines) for FDI regulatory restrictiveness, according to Organisation for Economic Cooperation and Development figures from 2014.

As economic growth slows down to about 6% and the Beijing authorities scramble to set an agenda for the “new normal” economic paradigm, they are increasingly focusing on a gradual liberalisation of the FDI framework to shore up growth.

Negative list

“FDI management has taken a major leap from case-by-case approval to negative list management,” said Mr Zhong after his February meeting with Beijing policymakers. The ‘negative list’ is an official regulations guide for foreign investors operating within FTZs such as Shanghai. Unlike the Catalogue Guiding Foreign Investment (CGFI) – which still exists in non-FTZs – the negative list removes restrictions imposed against foreign investors.

For instance, the negative list allows foreign investors to operate wholly foreign-owned medical enterprises within FTZs – a practice strictly prohibited by the CGFI – according to the US-China Business Council. This system provides Beijing policymakers with better management and suggests that China is more willing to open previously protected sectors to greater foreign investment.

During his address to Congress on March 6, Chinese premier Li Kequiang also described the government’s intentions to revise licensing application procedures and institute preferential policies for foreign investors. “Foreign firms will be treated the same as domestic firms when it comes to licence applications,” he was quoted as saying during his speech to the legislative body.

Besides internal restructuring, Mr Zhong and other Beijing policymakers are keen on establishing amicable relationships with trade partners abroad, especially US president Donald Trump. The US remains one of China’s largest foreign investors and one of its most important trading partners.

However, over the past four years there has been a gradual decline in US investment into China. US outbound investments to China declined from $15.96bn in 2012 to $13.12bn in 2015, according to the US-China FDI Project, a database operated by the National Committee on US-China Relations.

Strengthening US ties

Although Mr Trump has been highly critical of China in the past, Mr Zhong has affirmed his commitment to strengthening US-Chinese economic ties and has denied rumours of an emerging trade war between both sides.

If history is any indication of the future, Chinese policymakers will seek to attract foreign investors by increasing incentives. “FDI flowed into China in the past when foreign investors saw opportunities and a welcoming atmosphere in China,” says Steve Tsang, a professor at London’s University’s School of Oriental and African Studies.

Time will tell if the new incentives will be able to overcome China’s rising production costs, which stem largely from its burgeoning middle class and increasingly educated domestic workforce.