China

Executive Summary

China is one of the top global foreign direct investment destinations due to its large consumer base and integrated supply chains.  China remains, however, a relatively restrictive investment environment for foreign investors due to restrictions in key economic sectors.  Obstacles to investment include ownership caps and requirements to form joint venture partnerships with local Chinese firms, as well as the requirement often imposed on U.S. firms to transfer technology as a prerequisite to gaining market access.  While China made modest openings in some sectors in 2018, such as financial services, insurance, new energy vehicles, and shipbuilding, China’s investment environment continues to be far more restrictive than those of its main trading partners, including the United States.

China relies on the Special Administrative Measures for Foreign Investment Access (known as the “nationwide negative list”) to categorize market access restrictions for foreign investors in defined economic sectors.  While China in 2018 reduced some restrictions, foreign participation in many industries important to U.S. investors remain restricted, including financial services, culture, media, telecommunications, vehicles, and transportation equipment.

Even in sectors “open” to foreign investment, foreign investors often face difficulty establishing an investment due to stringent and non-transparent approval processes to gain licenses and other needed approvals.  These restrictions shield inefficient and monopolistic Chinese enterprises in many industries – especially state-owned enterprises (SOEs) and other enterprises deemed “national champions” – from competition against private and foreign companies.  In addition, lack of transparency in the investment process and lack of rule of law in China’s regulatory and legal systems leave foreign investors vulnerable to discriminatory practices such as selective enforcement of regulations and interference by the Chinese Communist Party (CCP) in judicial proceedings.  Moreover, industrial policies such as Made in China 2025 (MIC 2025), insufficient protection and enforcement of intellectual property rights (IPR), requirements to transfer technology, and a systemic lack of rule of law are further impediments to successful foreign investments in China.

During the CCP 19th Party Congress held in October 2017, CCP leadership underscored Party Chairman Xi Jinping’s primacy by adding “Xi Jinping Thought on Socialism with Chinese Characteristics for the New Era” to the Party Charter.  In addition to significant personnel changes, the Party announced large-scale government and Party restructuring plans in early 2018 that further strengthened Xi’s leadership and expanded the role of the Party in all facets of Chinese life: cultural, social, military, and economic.  An increasingly assertive CCP has caused concern among the foreign business community about the ability of future foreign investors to make decisions based on commercial and profit considerations, rather than political dictates from the Party.

Although market access reform has been slow, the Chinese government has pledged greater market access and national treatment for foreign investors and has pointed to key announcements and new developments, which include:

• On June 28, 2018 the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly announced the release of Special Administrative Measures for Foreign Investment Access (i.e., “nationwide negative list”), which replaced the Foreign Investment Catalogue.  The negative list was reformatted to remove “encouraged” economic sectors and divided restrictions and prohibitions by industry.  Some of the liberalizations were previously announced, like financial services and insurance (November 2017) and automobile manufacturing and shipbuilding (April 2018).  A new version of the negative list is expected to be released in 2019.
• On June 30, 2018 NDRC and MOFCOM jointly released the Special Administrative Measures for Foreign Investment Access in the Pilot Free Trade Zones (i.e., the Free Trade Zone, or FTZ, negative list).  The FTZ negative list matched the nationwide negative list with a few exceptions, including: foreign equity caps of 66 percent in the development of new varieties corn and wheat (the nationwide cap is 49 percent), removal of joint venture requirements on oil and gas exploration, and removal of the prohibition on radioactive mineral smelting and processing, including nuclear fuel production.
• On December 25, 2018 the NDRC and MOFCOM jointly released The Market Access Negative List.  This negative list, unlike the nationwide negative list that applies only to foreign investors, defines prohibitions and restrictions to investment for all investors, both foreign and domestic.  This negative list attempted to unify guidance on allowable investments previously found in piecemeal laws and regulations that were often industry-specific. This list also highlighted what economic sectors are only open to state-owned investors.
• On March 17, 2019 the National People’s Congress passed a Foreign Investment Law (FIL) that effectively replaced existing law governing foreign investment (i.e., the China-Foreign Joint Venture Law, the Contract Joint Venture Law, and the Wholly Foreign-Owned Enterprises Law).  As drafted, the FIL would address longstanding concerns of U.S. investors, including forced technology transfer and national treatment; however, due to lack of details and implementation guidelines, it is not clear how foreign investor rights would be protected.

While Chinese pronouncements of greater market access and fair treatment of foreign investment is welcome, details are needed on how these policies will address longstanding problems foreign investors have faced in the Chinese market, including  being subject to inconsistent regulations, licensing and registration problems, insufficient IPR protections, and various forms of Chinese protectionism that have created an unpredictable and discriminatory business climate.

Table 1: Key Metrics and Rankings