China Communist Party<img src="/sites/default/files/topics/2016/06/29/652x144.jpg" width="652" height="144" alt="" title="China Communist Party" /> image

China's Communist Party

It’s time for China to honour its pledge to open up the market and society – and play fair

Michael Clauss calls on party leaders to seize the opportunity of their sixth plenum to ease their tightening grip on foreign groups and businesses

PUBLISHED : Sunday, 23 October, 2016, 9:01am
UPDATED : Sunday, 23 October, 2016, 5:59pm

The Communist Party’s sixth plenum, starting this week, will deal with a chief topic of China’s reform policy: discipline and anti-corruption within the party. Looking at this choice, it seems that the leadership does have its finger on the pulse of the population. A recent Pew poll confirmed that corrupt officials are the No 1 concern in China, with a whopping 83 per cent of people polled considering this a major or somewhat major problem.

Why Xi Jinping’s bid to put ‘power in a cage’ must go to the very top

At this point in time, one year before the present five-year political cycle of the party ends, it is worth looking at what China has achieved from an outside perspective.

The third plenum of 2013 laid out an impressive reform plan. It put the market at the centre of economic policy. Even though it made only scant reference to the outside world, our hopes were high. If the party meant business, letting market forces rule would mean removing privileges for state-owned enterprises, creating a more level playing field with non-state-owned companies. This would benefit the bulk of foreign investment, which is part of the non-state economy.

Communist Party pledges greater role for constitution, rights in fourth plenum

The fourth plenum in 2014 also generated certain hopes. This was the first time a conference at this high level had been dedicated almost exclusively to the rule of law. This was also highly important to us. German companies, non-governmental organisations, scientists, artists and students see unclear, unpredictable and unevenly enforced laws and regulations as one of the main obstacles to their activities in China.

An unprecedented wave of complaints indicate a clear trend that doing business in China has become more difficult

Nevertheless, looking at the “reform dividend” for our companies and other actors working in China after three years, it is hard to hide our disappointment. Less corruption is certainly a positive factor. But will it last or can it only be sustained with unrelenting pressure from the top, which in turn can have unintended side effects? Less graft is often accompanied by less or slower activity when it comes to granting licences and approvals.

An unprecedented wave of complaints reaching our embassy and consulates indicate a clear trend that doing business in China has become more difficult, and not just doing business: we have a growing number of complaints from Germans and other Europeans wanting to travel to China being turned down on unspecified security grounds. This has even included sportspeople and scientists. And despite all assurances, the new NGO law, scheduled to take effect next January, looks set to undermine and even halt activities of German organisations. The draft rules issued have not allayed concerns of a possible bureaucratic nightmare.

Is China making life difficult for foreign companies?

To name but a few examples that point at less openness and a lack of rule of law:

First, electric vehicles. China’s draft laws on “new energy vehicles” provide that manufacturers, in order to get a licence, must localise not only the entire production but also the entire development process within China. According to a draft, this will be stringently monitored, inter alia, through a biannual renewal requirement for licences. This means that all foreign automobile manufacturers would be forced to hand over 100 per cent of their technology to their joint venture partners, mostly state-owned enterprises. Such regulations are not just a violation of World Trade Organisation rules, which form part of the law of the land, they are also unique. These restrictions have been the subject of numerous talks at a high level. So far, there are no signs of a positive response. Not even letters on the subject to ministers are answered.

Second, rail transport. In parts of the metro industry, there seems to be a points-based system for awarding contracts. The maximum number of points is given to domestic companies, half the number of points to joint ventures and zero extra points to wholly foreign-owned companies. Even companies which have localised production beyond the already massive requirements, like the leading systems supplier Knorr-Bremse – one of the first German companies to set up manufacturing facilities in China, right after Deng Xiaoping ( 鄧小平 ) started China’s reform and opening up policy – are facing an increasingly unsurmountable protective wall favouring Chinese state-owned enterprises.

Business groups slam China’s draft cybersecurity rules

Third, food and agricultural imports. A draft law sets new hurdles for quarantine inspection that, if adopted and implemented, could bring large segments of foreign food imports to a grinding halt. Unlike what is recommended by the WTO, namely to provide for certification only in the interest of the health of the consumer and to prevent the spread of pests or diseases among animals and plants, China wants to demand specific certification for all food imports, not just those that pose a risk. The draft has clearly overstepped the line between protecting the consumer towards outright protectionism of the domestic producer.

Fourth, infringements on intellectual property. There have been welcome attempts to improve the efficiency of the judicial system. However, it is hard to see how China can catch up quickly enough training and employing more qualified judges to deal with the colossal number of violations of intellectual property rights. Around 125,000 cases are pending. In this field, complaints from German companies are rising dramatically.

Hugo Boss, for example, continues to be the victim of a competitor using a similar name and even copying its web stores. Another example is a hi-tech supplier chiefly for the automotive industry, which recently became the victim of a so-called “trademark squatter”. Several top product brands of the German company were registered by a “businessperson” in China, who has now “offered” to “sell” to the German company the right to use its own brand in China.

For China to innovate, it must protect intellectual property rights

The list is endless and so colourful that it is hard to end it. One last example: a European architecture firm wins first prize at a competition but loses the contract to a domestic competitor, with the actual building going up later showing remarkable similarities to the prize-winning European model.

China is a huge economy whose potential is far from tapped. I am convinced that we can continue and even expand the highly productive mutual relationship we have had over the last almost 40 years. However, this requires that the worrying trends described here are reversed soon.

One encouraging sign is the debate on this issue in China itself. An article by an authoritative source in the People’s Daily in May, on the necessity for accelerated reform of state-owned enterprises, deleveraging and reducing overcapacity, and introducing a more level playing field for private companies, was impressive in its clarity and determination to forge ahead – even if it meant shutting down uncompetitive state enterprises. It is to be hoped that the sixth plenum will encourage these opinions. It has every opportunity to do so: a likely topic on the agenda is the relationship between the party and state-owned enterprises.

Michael Clauss is the German ambassador to China