This will probably be the last approval I give to an investment like this,” said the Ministry of Commerce official late last year as he stamped an US manufacturer’s application to invest in China.
A new catalogue on foreign direct investment (FDI) effective December 1, 2007 partially or fully closes the door to entire sectors of the country’s economy, including large swathes of low-end manufacturing. Developed by the National Development and Reform Commission and the Ministry of Commerce, the catalogue sets the tone for China’s economic policy in the years ahead.
“The new catalogue reflects an increasingly close fit between ‘policy’ and ‘law’,” said Michael Hickman of Fried Frank, a law firm.
The timing of the publication, shortly after the Communist Party Congress, and the close fit with the policy priorities announced there, point to an increasing sophistication in the use of investment policy to achieve economic, social and environmental objectives. The policy on the ground matches statements made by political leaders who are keen to use FDI to help them make good on commitments to create a “harmonious society.”
The new catalogue updates the 2004 edition and the changes are telling.
Sectors can fall into one of three categories: encouraged, restricted, or prohibited. Local governments can approve encouraged investments without Beijing’s rubber stamp, including FDI that targets the fields of high technology, environmental protection, research and development and services.
Restricted investments require state-level approval and include investment in low value-added manufacturing, heavily polluting industries and manufacturing for export. Real estate makes its first appearance in this category, reflecting popular concern about foreign developers profiting from rising property prices at the expense of ordinary Chinese.
Degrees of control
The list of prohibited investments in much shorter and includes areas that might impact the government’s monopoly on information (the press and internet) or on public morality (gambling and erotica).
Observers such as Steve Dickinson of law firm Harris & Moure say the Chinese are serious about the policy changes.
“This new catalogue marks a completely new approach to foreign investment in China. Investors aiming to profit from cheap labor, cheap energy or environmental degradation have been shown the door.”
The first hints of a new approach to foreign investment came in the 11th Five-Year Plan, which endorses the pursuit of economic growth alongside environmental and social goals. While the catalogue tracks these developments, it also reflects Beijing’s attempts to control with the pen what may be best left to the markets.
The problem is that investment in any given sector is unlikely to come just because it is included in a list. It depends on good market conditions or incentives. Investment in low-tech sectors now appears to be out of favor, but when it comes to finding jobs for low- skilled workers in western China, practical needs may prevail.
“Implementation is an open question and one of the main uncertainties for business will be the ability of Beijing to exert control over decisions at a provincial and city level,” said Dickinson.
International comparison offers further insight into China’s approach.
According to Ken Davies, a senior economist at the Organization for Economic Cooperation and Development (OECD), the FDI approvals process could become more transparent by ending the catalogue system and replacing it with a simple list of sectors closed to foreign investment, all other sectors being open.
“This is the way an open investment regime is maintained in OECD countries,” Davies noted.
But the catalogue can still be seen as a step forward in creating a more transparent economic policy as the gap between announced priorities and implemented law closes. This may add up to more certainty for foreign business.