China must be open to more foreign investment

Hu Shuli says the government is right to try to strike a balance between liberalisation and requiring security reviews to protect the nation

PUBLISHED : Wednesday, 11 June, 2014, 12:21pm
UPDATED : Thursday, 12 June, 2014, 2:18am

China is due to relax its rules on foreign investment shortly, in the first change of such regulations in a decade. The National Development and Reform Commission (NDRC) announced late last month that it would delegate to local governments the power to approve foreign investments.

This is welcome news to the international business community, though many believe the policy easing does not go far enough. They suggest that the government should get rid of its list of industries open to foreign investment to take a "negative list" approach, meaning it should only vet applications for those industries it deems sensitive. The government should heed their view.

China is arguably the biggest winner of globalisation in the past 15 years. But, as research has shown, its economic liberalisation is middling at best. In recent years, too, its allure as a destination for foreign investment seems to be on the wane. Indeed, many investment companies say the golden age for multinational corporate expansion in China is over.

The outlook is worrying. On the one hand, industries that allow foreign investment have become so competitive and costly that some foreign companies have moved on to find better opportunities in other developing economies; on the other hand, sectors that bar the entry of foreign investment are dominated by state-owned firms and interest groups, and the result is inefficiency from lack of competition. Left unchecked, these developments will be disastrous for the economy.

Those who think China no longer needs foreign investment are wrong. Instead, the government should seize the opportunities, post global financial crisis, to further open up the economy. This means allowing the market to make decisions on resource allocation and changing its administrative regulations. In short, it must shift from a "positive list" approach to a "negative list" approach.

The new regulations also require that "a security review should be carried out on foreign investments that involve national security". This clause has been the subject of much speculation. Some are reading too much into it.

As early as February 2011, the State Council issued a notice spelling out the need for such security reviews. Thus, the "security review" mentioned in the NDRC notice is not new. Inevitably, all nations must find a balance between opening up their economy and national security. The bottom line must be the nation's security. In this, China is right to learn from the national security protections in place in advanced economies.

To be sure, no company has been put through a security review since the roll-out of the State Council directive three years ago. One reason is the tough entry barriers set by the government for foreign investment. But, as China continues to lower its market barriers and make it easier for investment deals to be approved, the need for such a security review will become more apparent.

Not all countries around the world require such a formal security review, of course. Three that do are the United States, Germany and Canada. Among them, America, arguably one of the world's freest economies, was one of the first countries to put such procedures in place. In recent years, the Committee on Foreign Investment in the US, an interagency body under the Treasury Department, has blocked several high-profile deals involving Chinese companies, including China National Offshore Oil Corporation's bid for Unocal, and Huawei's bid for the start-up 3Leaf Systems.

The impetus for America's security review isn't to protect US companies, however. Rather, it is driven by strategic considerations and reflects US sensitivity to and focus on national security since the September 11 terrorist attacks.

America's authoritative and highly transparent process of reviewing sensitive foreign investments could be a model for China. Compared with the American committee's legal foundation, the grounds for China's security review appear more flimsy: they are based on an administrative document issued by the State Council, and do not make clear which other agencies apart from the NDRC and the Ministry of Commerce are involved, and the extent of their powers.

China also needs to spell out its definition of "security" to ensure a more stable investment environment. Much work lies ahead. In the process, the government must also watch out for protectionists seeking to block foreign competition using the pretext of protecting the nation.

China is holding talks with the US and European Union over a bilateral investment treaty. It reflects Chinese desire to be more integrated in the global financial system. This effort is commendable.

In the face of its immense social and economic challenges, opening up the economy remains China's best bet for reform.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.