By Brian Jackson, China Economist, IHS Global Insight
On 17 January, China’s State Council issued the Notice on Certain Measures Concerning Expanding Foreign Investment Attractiveness, listing a range of policy changes to improve foreign investment trends. The policy lays out major areas for market access opening, proposes new ways to secure a level-playing field, and additional administrative and regional measures to achieve those goals.
Market access
The policy includes around two dozen sectors scheduled for increased market access. The exact level of opening isn’t specified for most sectors, including any continuing foreign equity restrictions. In some cases in the past, foreign equity restrictions were made less stringent but nonetheless still barred majority ownership, making their impact muted in reality. It’s also noteworthy that some of the sectors are already relatively open on paper, so their listing either implies a shift to encouraged status, or reduction in behind-the-border barriers.
A summary of listed sectors follows:
- Services: banking-style finance, securities, investment fund management, futures, insurance, insurance agency, accounting and auditing, construction design, rating services, telecommunications, internet services, cultural services, education, and transportation shipping
- Industry: light railway equipment, motorcycles, ethanol fuel, cooking oil processing, shale oil extraction, oil sands, shale gas and other non-conventional mineral resources; cooperation conventional projects in oil and natural gas only need file for record, not for approval.
In addition to explicit market access openings by sector, the policy also offers some additional changes to sweeten foreign investors’ interest in certain thematic areas. First, the policy promises policies to encourage both foreign and domestic investment in sectors related to the China Manufacturing 2025 program, including high-end manufacturing, smart manufacturing, and green manufacturing. The policy also signals support for foreign investment in infrastructure, specifically listing power, transportation, water, environmental protection, and municipal administrative infrastructure. Third, the policy permits foreign firms to now participate in national science and technology research projects, including enjoying tax benefits related to the treatment of research and development costs. Finally, the policy hints at more convenient visa processing for high talent foreigners and their dependents.
Fair competition and investor convenience
The policy promises a range of changes to increase convenience, or least put foreign firms on the same footing as their domestic private sector counterparts. It forbids local governments restricting foreign access and requires they solicit foreign firms opinions on new policies. It also requires impacted ministries and local governments to unify business permitting processes for domestic and foreign enterprises. The policy calls for making the standards setting process more transparent, addressing a frequent concern of foreign chambers of commerce that home grown standards are used to simply as a form of non-tariff barrier. The policy states that foreign enterprise bids on government procurement contracts must be fairly considered, if the contract is fulfilled from a production facility located within China. Foreign firms are encouraged to list on various domestic equity markets, issue bonds, and use other financing methods previously available only to domestic firms. Finally, the policy eliminates foreign registered capital requirements except where explicitly required by other policies, and states an intention to unify domestic and foreign enterprise registration systems.
In addition to market access a fair competition, the policy also includes a laundry list of additional quality of life improvements. This include allowing foreign firms to be permitted to use land, access to improved foreign currency management tools, and other policies aimed at a convenience. The policy also leaves the now standard carve outs for some regions (western, northeast, etc.) to implement additional investment attraction policies, although emphasizes positive policies to increase attractiveness rather than restrictions to protect local industries.
Outlook and implications
The policy was clearly timed to coincide with President Xi’s recent speech at Davos. There he affirmed that China will continue to support globalization, as well as further open its doors to foreign investment. Much of the content of the document was known as early as December from draft documents released for public comment, and further details were hinted at in early January; the document itself was adopted on 12 January, highlighting that it was held for about one week before release to the public.
Regarding economic impact, the policy should have positive impact on productivity trends - if implemented as described. Some of the sectors listed are among the most state dominated in China, including most financial segments and energy extraction. Others are not only state dominated but also growing incredibly quickly, such as telecommunications and education. The quality of life and fair competition changes will also be welcome for smaller investors that China is increasingly trying to attract, given its abolition of minimum registered capital levels and visa convenience measures. That said, implementing details will be critical; for example, if market access improves for financial segments, but not enough to allow majority foreign ownership, the policy would be unlikely to change the status quo. That said, IHS Markit expects that the spirit of the policy is for a substantial opening that is likely to be reflected in implementing documents. This should help boost productivity in related sectors, although over a timescale of years rather than quarters. Finally, it is critical to highlight that China has progressively lower barriers to foreign investment in the last several years, yet at the same time total foreign direct investment continued to decelerate - highlighting the collapse in foreign investment in some traditional sectors that will continue.