Foreign investors have taken note of China’s easing on FDI. The US government should, too

  • Dominic Ng says while Beijing’s moves do not go far enough, they have made a real difference to foreign businesses entering the Chinese market, including US firms. Trade negotiators on both sides should seize on the opportunities this presents
PUBLISHED : Tuesday, 20 November, 2018, 11:33pm
UPDATED : Wednesday, 21 November, 2018, 6:27am

When the US and Chinese presidents, Donald Trump and Xi Jinping, meet at the G20 summit at the end of this month, trade tariffs will top the agenda. At the Asia-Pacific Economic Cooperation summit over the weekend, US Vice-President Mike Pence threatened to “more than double” the tariffs imposed on US$250 billion of Chinese goods, despite a list of trade concessions offered by Chinese officials in recent days. But trade is not the sole dimension of the US-China economic relationship, nor is it the only avenue for pursuing US interests.

One area that is not getting the same attention is China’s treatment of foreign investors. China has recently made tangible progress in further opening its economy to foreign investment, and American companies like Tesla and ExxonMobil are among the ones taking advantage. This facet of America’s engagement with China is critical to achieving the free, fair and reciprocal relationship Washington aspires to, and deserves an important place at the table.

While China still does not have the same openness to foreign investment seen in advanced economies such as the United States, it has made significant improvements in the past three years, with positive results for foreign companies. For one, it has moved from a “positive” to a “negative” list approach.

Under the previous system, foreign firms were only allowed to invest in sectors that were on a positive list of “encouraged” sectors, and every investment required approval by the government. Those approvals were often coupled with formal restrictions (for example, requirements to enter a joint venture) or informal expectations (such as sharing technology). Under the new regime, foreign firms are now by default allowed to invest in every sector, unless it is specifically mentioned on a negative list of restricted sectors. Moreover, for sectors not on those lists, firms do not have to apply for approval any more, but are merely required to register their investments.

The second notable change was a significant reduction of the sectors on the negative list, with the number dropping from 93 in 2016 to 63 in 2017, and just 48 in 2018. Many observers are unsatisfied with this still extensive list, but the situation has improved markedly in many sectors that are relevant for US companies, including electric vehicle production, aviation manufacturing, and certain financial services. If continued, it will get China to where it needs to go.

While there is a lot of cynicism in the foreign business community regarding the implementation of the more liberal rules, Beijing is taking those steps seriously. The best evidence is that, despite sabre-rattling by politicians and talk about decoupling, US companies are in fact expanding their investment into China.

The FDI earthquake you missed, and what it signals for global trade

According to China’s Ministry of Commerce, American FDI in China was up by 6.7 per cent for the period from January to September this year, compared to the previous year, and I see great appetite by US companies to increase investment in areas that Beijing has recently liberalised.

One high-profile example is Tesla, which has begun to build a US$2 billion wholly-owned electric vehicle factory in Shanghai. The factory will produce up to 500,000 Model 3 and Model Y cars per year for the Chinese and global market. This will be the first foreign-controlled auto plant in China, made possible by recent reforms to abolish restrictions on foreign majority ownership. Other foreign carmakers have already announced they will follow suit and acquire majority control of their existing China joint ventures, including Germany’s BMW.

Another example is the petrochemical sector, where China has gradually lifted restrictions since 2011 and now allows foreign-controlled manufacturing facilities. That has led to ExxonMobil planning a multibillion-dollar petrochemical complex in Guangdong to produce petrochemical materials to meet growing demand in Asia. ExxonMobil would be following BASF, a German conglomerate, which earlier this year announced it would invest US$10 billion in China’s first wholly foreign-owned heavy chemicals complex, also in Guangdong.

More clarity needed on role of Communist Party in listed firms

Finally, US companies are also poised to take advantage of recently announced changes in the financial sector. In April, China committed to allowing foreign companies to take controlling stakes in asset management and security firms (51 per cent immediately and 100 per cent in three years). Many firms are in the process of seizing that opportunity by taking control of their existing securities joint ventures, including JP Morgan and Morgan Stanley. This will position them better to serve China’s growing demand for wealth management, brokerage and other services.

Of course, these recent steps will not be enough to resolve existing US concerns about the lack of reciprocity in market access. However, the reforms and the response by foreign companies are much needed good news amid the current doom-and-gloom outlook.

The reforms show China understands that overhauling outdated approaches to create a more level playing field for foreign companies is ultimately beneficial for its own long-term prosperity. It also demonstrates that honest reform efforts with high-level buy-in can produce real change in the marketplace. The switch to a new approach is making a tangible difference for foreign companies in the affected sectors and is changing the way those companies think about long-term prospects in the Chinese market.

The opportunities presented by China’s progress on the investment front deserve an important place in the conversation between presidents Trump and Xi. Toughness is not an end in itself: it is a means to a mutually prosperous and constructive end.

Dominic Ng is chairman and chief executive officer of East West Bank