Wang Huiyao: Rising FDI, openness herald improved business environment

CGTN | November 04 , 2020

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A container vessel is loaded at Zhoushan Port, Zhejiang province. [Photo by Yao Feng/For China Daily]

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By Wang Huiyao | Founder of the Center for China and Globalization(CCG)

Foreign direct investment in China reached $103 billion in the first nine months of this year, up 2.5 percent year-on-year, the UN Conference on Trade and Development said in late October. Foreign investment inflows to China were down by just 4 percent, even with the epidemic.

In fact, foreign portfolio managers are moving funds to Chinese markets because Chinese growth rates are higher than elsewhere and because China’s steady monetary policy is creating higher returns than can be obtained in other markets.

China’s 14th Five-Year Plan (2021-25) will encourage foreign companies and investors to double down on their commitment to the Chinese economy, according to a communiqué released after the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China.

Significant progress will be made in the reforms of the property rights system and the market-based allocation of factors of production so that market entities will show more vitality. Fair competition within the market system will be further improved. Basically, China will form the new institutions necessary for a higher-level open economy during the plan period.

Thanks to deepening of opening-up and business environment improvement, China continues to attract higher levels of FDI. There was over $400 billion of new foreign investment from 2017 to 2019, with FDI inflows ranking second in the world for three consecutive years, despite the ongoing trade frictions.

China’s performance has strengthened the confidence of foreign multinational corporations in the Chinese market. MNCs such as General Electric, Fujifilm, Schneider Electric, Schindler Group, and Air Liquide Group swear by their expansion plans in China, despite the COVID-19 impact on the economy.

The 2020 Global Enterprises Report: MNC New Development in China, published by the Center for China and Globalization in September, listed top 25 foreign investments this year in China covering the automotive, energy, chemical and high-tech industries. The report stresses that both policy and market factors are important to foreign investors.

At the policy level, a higher level of openness can be implemented. This includes relevant laws and regulations, such as the Foreign Investment Law which provides institutional guarantees for investment by foreign enterprises.

The FIL came into force on Jan 1 this year and is the first comprehensive and systematic foreign investment legislation in China’s history. It makes clear provisions on the promotion, protection, management and legal responsibility of foreign investment, ensuring that foreign investment in China is supported by the government, protected by law and managed in a standardized manner, thus reassuring foreign investors.

Since the implementation of the FIL, the market environment has gradually improved. Data from the Ministry of Commerce show that from January to June, foreign investment in China amounted to 472.18 billion yuan ($70.97 billion).In June, foreign capital investment amounted to 117 billion yuan, an increase of 7.1 percent year-on-year; in the second quarter, the year-on-year growth was 8.4 percent which was a significant recovery from the first quarter (down 10.8 percent).

To further improve business environment for foreign MNCs in China, I would like to put forward four policy recommendations:

First, further improve the legal environment for foreign investment in China. The enactment and implementation of the FIL is a good start, but the real challenge lies in the implementation and enforcement of the law at the executive level.

The clearance of the former regulations and normative documents related to foreign investment management can be completed as soon as possible and published in a timely manner, so as to ensure that the FIL and its implementing regulations can be truly implemented in place and provide a strong legal guarantee for the formation of China’s high-level opening-up pattern.

Second, further improve the negative list system and optimize the foreign investment environment. This year’s version of the national negative list for access to foreign investment has been reduced from 63 items to 33, and the negative list for access to foreign investment in the pilot free trade zones has been reduced from 190 items to 30. Against the backdrop of the prevalence of global trade protectionism, this fully demonstrates China’s determination and action in opening-up to the outside world.

However, as China’s introduction of the negative list has been in effect only for a short time, and the related institutional reform is still in the exploratory stage, China’s current negative list management model still suffers from such problems as vacancies in the relevant legal system and inconsistency between industry classification and international standards.

On the basis of the existing negative list, further studies should be conducted to narrow down the negative list－such as allowing foreign investors to enter into new infrastructure projects, encouraging foreign-invested enterprises to cooperate with Chinese companies, especially in technological R&D and innovation, and jointly promoting innovation in “new infrastructure “projects.

Third, consider joining high-standard trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and actively expand multilateral cooperation. If China joins the CPTPP, the economic volume of the trading system could reach 28.3 percent of the world’s total, making it a large market of nearly 1.9 billion people.

There is still a gap between China and the CPTPP, and China needs to take the initiative to seek convergence with CPTPP standards, strengthen intellectual property protection and improve its business environment. At the same time, China should continue to push forward the negotiations of the Regional Comprehensive Economic Partnership Agreement (RCEP).

Beijing and Tokyo should upgrade their investment pact, which will boost the progress on trilateral China-Japan-South Korea Free Trade Area to deepen China’s integration into the regional economic system.

Fourth, promote the construction and exploration of free trade zones and ports to attract foreign investment. China’s 18 FTZs should give full play to their role as early and pilot tests of negative list management, which can be carried out in accordance with the characteristics and advantages of each FTZ. Foreign MNCs in the FTZs have more policy space and preferential conditions to carry out foreign trade and economic cooperation.

Also, on June 1, China released the master plan for Hainan free trade port. The “zero tariff” policy planned for the port is an important start, which can be followed by “zero subsidy” and “zero barrier” in the future.

On this basis, the “three zeros “policy can be implemented in the coastal free trade zones first, and eventually the successful experience can be extended to the inland areas, pushing the 18 FTZs to gradually develop toward “three zeros” trade in stages. With a simplified tax system and a strong rule of law, China’s opening-up to the outside world will reach a new height, breadth and depth.

 

From CGTN，2020-11-4