China’s state-led economy makes it clear for foreign firms: you’re either OK with regulatory requirements, or you’re out

American and international firms are pondering whether they should enter or expand operations in China’s domestic market, which increasingly operates under state direction with lines blurred between Chinese companies and government authorities.

On the one hand, the market of 1.4 billion potential consumers is difficult to ignore. Many large, Western-based companies derive significant portions of their global profits from doing business in China.

But foreign companies have long complained about unequal treatment and market restrictions in the Chinese market compared with the access granted to Chinese state-owned enterprises (SOEs), which makes conducting business in China more difficult, and more expensive, than elsewhere.

The stakes are rising as the Chinese Communist Party (CCP) is stepping up its control over different parts of the economy, particularly in response to the coronavirus pandemic, raising political and regulatory risks for investments in China, according to analysts.

Challenges in toeing the party line, censorship, and strict controls on capital flows are among the uncertainties that foreign firms face when conducting operations and making investments in China.

“If you are running a business in developed markets, you know how to price in your costs. But in China, it is impossible to price in the regulatory risk,” said Zhuang Bo, chief economist of China research at TS Lombard. “You don’t want to go against the party line and end up stuck in a difficult position and become subject to some Chinese regulation.”