Why China’s opening up to more foreign investment is unlikely to narrow its trade differences with the US
- Beijing and Washington are misdiagnosing each other’s complaints as economic in nature rather than political, and China’s new ‘negative list’ of restricted sectors is a continuation of this trend
In it, Beijing moved to open a number of areas previously closed to foreign investment, particularly in telecommunications, logistics, energy and culture, by reducing the number included from 48 to 40.
For example, it includes requirements on joint ventures, ownership caps and outright bans on investment. Though detailed and cumbersome, it is the major means by which China will take steps to fulfil its pledges to open up additional sectors.
Some steps are significant.
For example, Beijing removed investment restrictions in value-added telecommunications and shipping agencies, eliminated the joint venture requirement for oil and gas exploration, and opened cinemas and talent management organisations to foreign ownership.
This demonstrates previously unseen steps, in that they are in industries China has historically deemed “strategic” or tied to “national security”.
Beyond this, a new list of “encouraged” sectors was also released (it had not been updated since mid-2017) to include 5G core components, semiconductors, memory chips, new-energy vehicles and other important hi-tech products.
Beijing is thus making a good-faith effort to follow up on its continued pledges to “reform and open up”, even in areas previously closed to foreign participation.
As is typical with China’s reform timeline, however, these moves may serve to remove the ostensible legal barriers to foreign participation without significantly altering the playing field for foreign companies.
It may be more expedient, for example, for foreign energy companies to take on a joint venture with a state-owned Chinese company, given that state-owned entities still dominate the industry.
Openings in the telecoms and hi-tech industries, for example, are probably intended to signal that Chinese government involvement in these sectors should not be a cause for concern for foreign players.
Openings in the state-dominated energy sector are significant for industry players. The country is a net energy importer, however, and significant portions of its reserves are offshore in disputed waters that China claims as its own territory.
US officials are pushing for LNG cooperation in talks with Southeast Asian countries such as Vietnam and the Philippines, as Trump touts forecasts for the United States to become a net energy exporter.
So, investment in domestic Chinese capacity by major US and multinational energy companies – particularly when it involves the potential to become bogged down in contested maritime claims – is unlikely to be seen as a positive development.
In the film industry, the ability to invest in cinemas may help bolster the bullish expansion plans of companies like IMAX in the world’s largest movie market.
But the biggest non-tariff barrier and major woe for Hollywood remains the annual film quota, which ironically now sits under the responsibility of the Propaganda Department following the reform plan for party and state institutions, released after last year’s National People’s Congress.
As a result, the Chinese government’s overbearing regulation of the so-called “culture” sector has yet to improve in any meaningful way.
In the end, China will only move forward with significant reforms if the leadership sees sufficient domestic benefits, which the propaganda apparatus can paint as efforts to reform on China’s own terms.
With the recent passage of the Foreign Investment Law and release of this new nationwide negative list – already significant steps for the cumbersome Chinese bureaucracy – Beijing also has fewer avenues to address US demands.
Unfortunately, whoever was responsible for the list’s drafting seemed to think that encouraging foreign investment in politically sensitive sectors such as 5G technology and integrated circuits, already laden with government interference and forced technology transfer, would assuage international and, more specifically, US concerns.
Ultimately, each side is treating the other’s concerns as fundamentally economic in nature, when in fact they are rooted in political considerations.
The international anxiety around Huawei and potential commercial espionage is not simply driven by the state’s role in this sector, but based on past evidence that the party leverages technology for political purposes.
The Trump administration, meanwhile, is overwhelmingly focused on the trade balance, an issue tied to the president’s base and one that will not fundamentally alter the playing field for US companies and foreign investors operating in China.
As a result, both sides are talking past each other in their attempts to address politically motivated demands with quick economic fixes.
The reforms embedded in China’s new nationwide negative list are encouraging developments for the country’s investment climate, but will not alter the underlying disparity – and resulting friction – between the two countries’ political models.
Austin Lowe is a Washington, DC based consultant and analyst specialising in US-China relations and Asia policy