China’s Improved Business Climate Alluring for Foreign Investors
On April 10, 2018, Chinese President Xi Jinping delivered a keynote speech at the opening ceremony of the Boao Forum for Asia Annual Conference 2018, in which he promised, “China’s door will never be closed and it will only open wider.”
On April 10, 2018, Chinese President Xi Jinping delivered a keynote speech at the opening ceremony of the Boao Forum for Asia Annual Conference 2018, in which he promised, “China’s door will never be closed and it will only open wider.” Furthermore, he announced several actions to be taken in the future: significantly broadening the market access, further improving investment environment, strengthening protection of intellectual property rights, and taking the initiative to expand imports.
Now, one year later, how has the country honored its commitment? Let’s take a close look.
A Top Global Investment Destination
On February 26, 2019, the American Chamber of Commerce in China (AmCham China) released the 2019 Business Climate Survey in Beijing, which shows that 62 percent of American member companies view China as a top priority for their global investment plans, while more than 80 percent of the member companies expect positive industry growth in 2019. In addition, confidence in China’s commitment to further open its market is at the highest level since members were first asked about it in late 2016, with 50 percent optimistic about steps to be taken to open markets further for foreign companies. In the Resources and Industry (R&I) sector, 53 percent of companies believe that the market for foreign investment will become more open in the coming three years, up from 40 percent in 2017. This is the 21st year that AmCham China has surveyed its members on the business environment in China.
“Bright prospects for domestic consumption and a modestly improved investment environment have helped China remain a top investment destination globally,” said Tim Stratford, Chairman of AmCham China. “Likewise, as AmCham China enters its 100th year, we will continue to strive to foster a healthy commercial relationship between the U.S. and China.”
Even with stronger domestic competition, rising costs, and profitability pressures, over 80 percent of the member companies expect positive industry growth. The continual rollout of incentives in China to encourage consumption promises growth in domestic consumption and the rise of an increasingly sizeable and affluent middle class offers huge business opportunities. And ongoing economic reforms give investors another dose of optimism. The globalization of Chinese companies and increased outbound investment are providing valuable development opportunity for the services sector. Many respondents also selected healthcare reforms such as “Healthy China 2030” and increasing customer demand for foreign and higher-quality brands as good opportunities.
The consumption sector has attached great importance to Chinese markets, with technology & R&D-intensive industries prioritizing China in their investment plans. According to interviews with member company representatives, China remains a desirable investment destination, with new opportunities emerging due to gradually increased market access and China’s role as an enabler for their global strategies. Members continue to see improvements in the quality of China’s investment environment, 14 percentage points higher than that in 2016, reaching to 38 percent. When looking further into the data, aerospace, healthcare services, and retail & distribution sub-sectors are the most optimistic, with no respondents reporting deterioration in China’s investment environment.
Opening-oriented Institutional System
“To create a sound business environment, we must readjust our rules, standards, and institutions to meet the needs of modernized development,” said Zhang Yansheng, principal researcher of the China Center for International Economic Exchanges. It requires China to open wider in terms of rules and regulations, strengthen cooperation with other countries, and take the initiative to learn from international rules. It also requires the government to speed up its self-reform so as to realize the modernization of governance capability. At the Central Economic Work Conference convened in late 2018, it was also clearly proposed to promote the transition from opening up based on flows of goods and factors of production to opening up based on rules and related institutions.
On December 23, 2018, the 7th Session of the Standing Committee of the 13th National People’s Congress, China’s top legislature, reviewed the latest draft of China’s Foreign Investment Law, and three days later, published it on the official website of the NPC, soliciting opinions from all sectors of society.
Compared to the Draft Foreign Investment Law 2015 released in January 2015 by the Ministry of Commerce, the latest draft made substantial adjustments and condensed the contents from 170 provisions to 39. It clarifies the management system of pre-establishment national treatment plus negative list, pays more attention to the promotion and protection of foreign investment, and makes principle provisions for foreign investment regulation system, including information reporting system and the security review system. After the new law was formally promulgated, a new system of foreign investment legal framework will be formed to further facilitate foreign investment.
AmCham China shared their views on the Draft Foreign Investment Law and submitted their opinions, touching on the following key points: They appreciate the Chinese government’s commitment to promote a predictable, transparent, and fair legal and regulatory regime for foreign investment in China, which is an important indication of China’s continuing desire to open up further; they suggest to eliminate the foreign-invested enterprise (FIE) classification and govern all legally-established companies in China under the same laws and regulations that apply to domestic enterprises; they believe that any review process should be narrowly defined around legitimate national security risks, and not include broader issues that may create opportunities for protectionism; and they urge the relevant Chinese authorities to quickly provide detailed guiding rules and implementation measures.
Some business challenges and sensitive issues are also listed in the 2019 Business Climate Survey, including China’s IPR protection. According to the released report, 59 percent of members believe China’s IPR enforcement has continually improved or stayed the same over the past five years. Nearly half of respondents share the same amount of proprietary knowledge with their Chinese partners as elsewhere; R&I companies tend to share more than those in other industries. Meanwhile, insufficient protection and difficulty in prosecuting IP infringements are the top two IP challenges member companies face according to the survey.
The members suggested that actions should be taken by both the Chinese and U.S. governments to improve China’s business environment and foster more sustainable economic ties between our two countries. Substantial improvements in market access, IPR protection, regulatory transparency, and evenhanded enforcement are all cited by members as critical to their continued success. Additionally, members are asking the U.S. government to advocate even more strongly for a level playing field, pursue investment reciprocity, and engage in results-oriented discussions between the two sides.
During the regular press conference of the Ministry of Commerce held on February 28, spokesperson Gao Feng gave positive responses to some challenges American companies listed in the 2019 Business Climate Survey. He welcomed pertinent suggestions and advice from foreign chambers of commerce in China and promised that the Chinese government will unswervingly further its opening-up, broaden market access to foreign investment, optimize the environment for foreign investment, increase the transparency of market regulation, enhance the protection of the legitimate rights and interests of foreign-funded enterprises, establish and perfect the mechanisms to deal with complaints from foreign companies, coordinate and address the legitimate concerns of foreign investors, and create a more attractive investment environment for foreign investors.
Record-breaking Reforms on Business Climate
Authoritative reports on China’s business environment not only include the AmCham China report, which has drawn lots of attention given the ongoing bilateral trade frictions, but also some other international organizations, such as the World Bank and the United Nations Conference on Trade and Development (UNCTAD) which released their reports right before the first China International Import Expo (CIIE), showcasing China’s rising attraction for foreign investment.
On October 15, 2018, the UNCTAD published the latest Global Investment Trends Monitor. According to it, in the first half year of 2018, global FDI had a year-on-year decline of 41 percent to approximately US $470 billion, but the FDI in China rose 6 percent in contrast, totaling US $70 billion, ranking first worldwide and becoming the world’s largest destination for FDI.
10 days later on the regular press of Ministry of Commerce, spokesperson Gao Feng said that the Chinese market would further open to the world and lift its restrictions on foreign investment. He pointed out that the UNCTAD’s report fully embodied the confidence of foreign investors in China’s business environment and their positive expectation of future investment in China.
A week later, on October 31, Doing Business 2019 – Training for Reform was released by the World Bank, and China advanced to a global ranking of 46, up from 78 last year, making it one of the top 50 economies in the world for ease of doing business. It was reported that the top three rankings were New Zealand, Singapore, and Denmark, with Hong Kong listed No.4, and the U.S. No. 8.
The World Bank’s report also indicated that in the past year, China had implemented the largest number of reforms — 7 items in total, to improve the business environment for medium- and small- enterprises, earning the country a spot in the top 10 global improvers in 2018, and the top nation in the East Asia and Pacific region.
Initiated in 2003, the World Bank’s program monitors 190 economies’ business environment in different areas including starting a business, processing construction permits, getting an electricity connection, property registration, getting loans, protecting small- and medium- investors, paying taxes, conducting cross-border trade, fulfilling a contract, and handling bankruptcy. Statistics show that since 2003, 186 economies among these 190 have implemented 3500-plus reforms to improve their business environment.
Bert Hofman, the World Bank’s Country Director for China, also lauded China’s improvement in business environment, “China has made rapid progress in improving its business climate for domestic small- and medium- enterprises in the past year, making it now one of the top 50 economies in the world for ease of doing business. The progress signals the value the government places on nurturing entrepreneurship and private enterprise.”