China's self-contradictory policies toward Foreign Investment

By He Qinglian on September 3, 2014
Source article in Chinese: 南辕北辙的中国外资政策

Given that international capitals have yet to find an investment alternative to China, the country's policy toward foreign investment is a matter to which people pay close attention. On September 10, at the World Economic Forum held in Tianjin, Chinese Premier Li Keqiang delivered a speech pledging that China would further open its door to foreign investment:—
“We oppose all forms of protectionism...we adhere to practicing a more proactive opening strategy.”

The direction announced in that speech was precisely the antithesis of China's policy toward foreign investment effective since last year. Beginning in last year, investigations launched against foreign automobile companies, pharmaceutical firms and technology providers sparked worries among foreign businesses in China. As a result, the amount of foreign investment in China took a dip. The data from the Ministry of Commerce showed that in July, the amount of foreign investment in China fell by 16.95% year-on-year.

The good times for foreign enterprises in China ended

The good times for foreign investment in China have long been over. Starting from 2013, the Chinese government simultaneously investigated foreign enterprises for bribery and monopoly. The list of foreign companies, especially major multinational enterprises subjected to anti-monopoly probe is getting longer and longer. In August alone, three companies—Microsoft, Chrysler, and Volkswagen AG—were investigated.

Foreign giants like Microsoft are assessing the possible impacts of this anti-monopoly drive. The attitude of the Chinese government toward foreign companies today is in stark contrast to that of three decades ago when foreign enterprises began entering the Chinese market. In those days, owners of major enterprises were often received by state leaders who called them “friends of China”, as depicted in the popular Chinese TV series Deng Xiaoping.

And the ties between US companies such as Microsoft, General Motor and Boeing and the Chinese government were especially strong. Before China's entry into the WTO, these companies lobbied for China's MFN status at Congress every year; in order to help China enter the WTO, these enterprises put together their funds and resources to launch the most expensive lobbying in American history and they held a big celebration after China succeeded in becoming a member of the WTO.

When China reformed its tax system and canceled tax concession for foreign companies, many left the country. Microsoft and other China lobby companies, however, remained certain that they were still seen as “friends” of China.

In 2013, China's National Development and Reform Commission (NDRC) conducted anti-monopoly probes against dozens of foreign powdered milk manufacturers, fining six companies—Med Johnson and Fonterra included—for a total of 668 million yuan. At the same time, Beijing began looking into acts of bribery foreign enterprises committed in China. The first company that took the hit was GlaxoSmithKline (GSK), some of its senior management staff members were investigated for serious economic crimes. Pharmaceutical giants such as Sanofi and Novo Nordisk were subsequently investigated according to reports.

Foreign firms in China watched with fear and worries as this wave of fining unfolded.

For now, companies like Microsoft, General Motors and Volkswagen AG do not want to withdraw from the Chinese market, which they had painstakingly developed for years. Facing investigations, these companies didn't dare to voice their dissatisfaction; instead they were quite cooperative. General Motors stated that since 2012, the company had been “responding” actively to the requests from the NDRC Price Supervision and Anti-Monopoly Bureau and assisted in the surveys and studies on the automobile industry. And recently, Volkswagen AG (China) issued a statement saying that the Chinese government found its distributor network violated the National Anti-monopoly law, the company closely cooperated in the investigation and is prepared to accept punishment. It's said that the fine to be meted out to Audi might be up to 1.8 billion RMB, setting the record for anti-monopoly fine in China.

The aim of anti-monopoly drive: squeeze out foreign enterprises

As leaders in the automobile, IT and pharmaceutical industries took hit, this “anti-monopoly storm” became the subject to which international media organizations paid continuous attention, various theories about the motives of this probe had been put forward. The view of Bloomberg on this was that the “antitrust campaign” in China signals the beginning of a new regulation era and possibly the end of the times when Audi and Starbucks reaped greater profits in Beijing than in London and New York. However, the reality might be a lot grimmer than Bloomberg's assessment.

The reason the Chinese government launched this anti-monopoly campaign was that huge changes happened to the country's domestic industries and market. Through various ways of “exchanging market for technologies”, China greatly enhanced the technological strength of domestic enterprises and economies of scale have now taken shape in some industries. The ebbs of Japanese manufacturing industry coincide almost entirely with the flows of that of China. Probably for this reason, the majority of Japanese media outlets regarded this wave of anti-monopoly probes as actions to deal a blow to foreign companies and protect domestic companies. For instance, the Mainichi Shimbun pointed out that the targets of the anti-monopoly probes of the Chinese government were predominantly foreign enterprises which enjoy high market share and the probes have chiefly been conducted in fields where Chinese local enterprises are struggling.

As a combined result of foreign powdered milk companies becoming targets of government crackdown and of Chinese consumers having no confidence in national powdered milk products, a powdered milk shopping service that specially caters for Chinese people emerges and some Chinese diaspora broke their local law because of this service.

The sense of helplessness of foreign firms facing Chinese protectionism

On August 11, Fortune ran on its website an article that said the thinking of China’s business domains are changing, and economic nationalism is gaining momentum. Under this circumstance, Western enterprises must formulate effective strategies to safeguard their own interests. That article went on to argue that under the Chinese legal system, judgments not in favor of the government could not possibly be made. For this reason, the most effective defense would be initiation of strong offensives. If Beijing does not have a reason behind its anti-monopoly actions, western enterprises should lobby their own government into taking tit-for-tat actions against China.

I do not know what those foreign business owners and/or management would think after they read this Fortune article, but I can be sure that no governments would fall out with Beijing for the interests of their firms in China.

When it comes to making decisions and taking actions, democratic countries which have a separation-of-powers institution in place are far less decisive than autocratic countries and it is rather difficult for the administrative and the legislative branches of these countries to reach a consensus. It is, for example, next to impossible that the White House and Congress—or, for this matter, the judiciary—would agree with each other on the issue of protecting American firms in China.

Take the recently settled case of China’s Sany Group suing President Obama in the US for example; although this case concerned the national security of America, the Federal Court of Appeal in Washington D.C. judged that Sany won the appeal.

This case demonstrates both the judicial independence of the US and the fact that democratic countries may be disadvantaged when and if they fight economic war with autocratic countries like China.

It's very likely that foreign companies in China would keep their heads down and continue to accommodate Beijing to stay in the Chinese market. This is the approach that many foreign enterprises are taking or have already taken: although foreign companies may not be happy about the raids and high fines from China's enforcers, their spokespersons told the media that the punishment meted out by the Chinese government made sense.

If keeping their heads down is still not enough for these companies to stay in the Chinese market, the only option might be to withdraw from the Chinese market. The real problem, however, is that there are serious fund surpluses in capital markets around the world, so far multinational companies and international investment banks have yet to spot a market that could replace China, and China is no longer in want of funds like it once did and has long become a capital-exporting country.

Because of this, even though China is stepping up its anti-monopoly campaign that targets specifically foreign firms, multinational companies, with a large number of dealings in China, are biding their time, hoping that this would merely be a “protectionist movement” that would soon be over.

China claimed that, through changes to policies toward foreign capital, it wants to “make structure adjustment the primary direction for optimizing the use of foreign investment” and thereby “making effective use of foreign investment”, the results achieved have gone the opposite direction of its claim, though. China's Ministry of Commerce released in August the latest data, which showed an overall decline in investment from traditional origins: Japanese investment in China was 2.83 billion dollars, a plunge of 45.4% year-on-year; American investment, 1.81 billion dollars, falling by 17.4% year-on-year; and the 28 EU countries, 3.83 billion dollars, a drop of 17.5% year-on-year.Compared to labor-intensive investment from Taiwan and South Korea, investments from these countries are of high quality and are conducive to adjusting the Chinese economic structure. Hence, how to make effective use of foreign investment would be one of the policy considerations of the Chinese government.