It’s in China’s own interest to level the playing field for foreign companies

Michael Clauss calls on Beijing to play fair by the many foreign firms that have a stake in China’s market, not only by protecting intellectual property but also by including these companies in its reform plans

PUBLISHED : Sunday, 22 May, 2016, 1:02pm
UPDATED : Sunday, 22 May, 2016, 1:01pm

From a German perspective, recent powerful messages by China’s top leadership and its advisers on China’s economic reforms are right on target: we in Europe know full well what the risks are if an economy relies on debt-fuelled stimulus. And we also know how hard it is to wean an economy off this “sweet poison”.

It is particularly encouraging that reform of China’s overprotected and overleveraged state-owned companies, for a long-time shoved towards the back of the reform agenda, seems to be slowly moving onto centre stage.

And yet, from the perspective of a country like Germany, whose companies have invested and taken risks in China since the first days of its reform and opening up policy – we now have 6,000 companies in China with investments well in excess of US$60 billion – there is one element missing, which will create mounting hurdles if not addressed swiftly: a level playing field for foreign companies, in words, best written into laws and unequivocal and predictable regulations, and in deeds, that is, rigorous implementation.

Our companies, unlike some sectors of China’s ‘home-grown’ companies, do not feel any lightening of the heavy hand of government

Looking back over the past 30 years, this has of course always been a mainstay of discussions by German and other leaders from major economies with China. And, while things were never perfect in the past, things were more or less moving in the right direction: towards a further opening of China.

At the political level, we are assured that China will continue its path of reform and opening. These are welcome and necessary signals. However, when we look at the daily reality of German companies in China, we have strong indications that further opening has not only slowed but seems on the brink of turning in the wrong direction. Our companies, unlike some sectors of China’s “home-grown” companies, do not feel any lightening of the heavy hand of government and the plethora of administrative bodies involved in licensing, security controls and “management” of any kind.

Chinese outbound investment is increasingly being freed of the shackles of government, but not inbound investment. Chinese companies are free to buy whatever company they desire; in Germany, this mostly means well-functioning hi-tech companies that China hopes will help it reach its goals of turning China into a 21st century’s manufacturing powerhouse.

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I firmly believe that it is not only justified, but in the world’s long-term interest, if China’s economy no longer only leads in toys, cement and steel, but joins the fray also on planes, trains and automobiles. And, if need be, even robots – a Chinese company has just made a takeover offer for one of Germany’s prime manufacturers of industrial robots and automation: Kuka. Germany remains one of the Western industrialised economies which does not place restrictions on such investment.

How does China reciprocate? Precisely because of the heavy hand of government in their affairs, foreign companies are fearful of reprisals if they were to go public when they feel they are targeted by discriminatory and protectionist practices. Only blatant cases, such as the difficulties experienced by Hugo Boss, occasionally come to light. Despite being one of the earliest registered trademarks in China, Hugo Boss has been unable to convince authorities to reign in a cheap competitor using a deceptively similar name.

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Information given to me behind closed doors, however, shows me that Hugo Boss is only the tip of an iceberg. Complaints by German companies to me have risen steeply. They include theft of intellectual property, increasingly intrusive government oversight focusing on technologically sensitive areas and regulations forcing companies to hand over technology outright.

Some of the examples I hear make it hard not to conclude that this represents the beginning of a new trend. Just recently, a globally successful company that has had investments in China for around 30 years told me that they have spotted exact copies of its factories built in parts of China that are currently particularly hard hit by the economic slowdown. They had not seen anything similar for many years. Other companies complain about a considerable tightening of requirements to hand over technology as a condition for licences. These requirements target more and more core technology components in strategic growth areas. This would be a clear violation of World Trade Organisation rules. However, some mid-level officials seem to believe they can get away with this if they just apply enough pressure to make compliance appear voluntary.

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President Xi Jinping (習近平) has personally highlighted the importance of levelling the playing field between private companies in China and state companies. He stressed property rights and specifically mentioned intellectual property. Maybe this reflects worries about a decline in investments by the private sector in China, which seem to be flowing into investments abroad.

At present, it is not clear to us what the reform plans will mean for foreign-invested companies. There are some signs that China has decided that it will focus reform on exclusively Chinese solutions by massive state support for home-grown champions – state-owned or privately owned. This would mean more protectionism by either shutting out foreign competitors, or opening the gate to China’s market to them only if they hand over the keys to their treasure chest: technology.

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Due to the size of the Chinese market, such a plan might lead to short-term positive results in some sectors, such as internet services. It can certainly lead to high profits for those who thrive behind the protective walls of quasi monopolies, such as telecoms. In my view, this approach, albeit tempting, should be discarded. It will only lead to islands of high competitiveness, surrounded by an ocean of misallocation, and it will stunt efforts to stamp out corruption. In the end, it will fail to unleash sufficient new sources of growth, which must be broad-based in order to generate the level of economic progress that China – and the world – so urgently needs.

Almost all German investments in China are investments by private companies. Foreign companies must be expressly included in China’s great plan to achieve a level playing field in its economy, irrespective of “ownership structure”. This would be the right path to achieve China’s development goals.

Michael Clauss is the German ambassador to China