How China refines its biz climate for foreign investors

There may be more changes to China's business environment than you thought.
How China refines its biz climate for foreign investors

Photo taken on November 4, 2020 shows a light show at the Lujiazui area in Shanghai, east China. 

There may be more changes to China's business environment than you thought.

Over the past years, China has shortened negative lists for market access, attracting more international brands to enter the world's largest consumer market. The ceiling of statutory damages of intellectual property rights (IPR) infringement was raised higher, and the country's overall tariff level was lowered. These moves help stabilize foreign enterprises' confidence and investment.

Figures speak for themselves. Foreign direct investment (FDI) into the Chinese mainland, in actual use, expanded 6.2 percent year on year to a record high of 999.98 billion yuan in 2020. In US dollar terms, the inflow went up 4.5 percent year on year to 144.37 billion dollars, the Ministry of Commerce (MOC) said Wednesday.

Even in typical times, achieving all this progress at the same time can be difficult, let alone in a year during which COVID-19 significantly disrupted global business activities, coupled with rising protectionism. This progress also comforted people who still have faith in economic globalization and free trade.

'Above-average' performance in China

China's strong FDI formed stark contrast to the rest of the world. According to the United Nations Conference on Trade and Development (UNCTAD), global FDI dropped by nearly half in the first six months of 2020.

The UNCTAD attributed China's resilient performance to its leading position in controlling the epidemic and resuming its production system among countries in the world.

According to a report recently published by global consulting firm Ernst & Young, the three major German carmakers Volkswagen, BMW and Daimler benefited to an "above-average extent" from the market recovery in China as their Q3 sales in China increased by 9 percent year on year.

Ola Kallenius, CEO of Daimler, told Xinhua that the German automaker is eyeing new opportunities in China's rapidly growing market for electric cars thanks to its economic recovery and the brisk demand for new energy vehicles in the world's largest auto market.

With its 1.4 billion people and over 50 million highly-skilled workers, China is too important a market for foreign capital and multinationals like Daimler to ignore. Official data showed that more than 1 million foreign-funded enterprises had established themselves in China by the end of 2019.

A better business environment has not only helped China retain investment and job opportunities but also allowed foreign manufacturers to produce higher quality products more efficiently in China, meeting local and global demand.

However, foreign doubts and criticism over China's business environment still exist. While some of those are stereotypes, some others, such as market access restrictions and regulatory barriers, have already been improved.

How China refines its biz climate for foreign investors

Employees work at the Tesla Gigafactory in Shanghai, east China, Nov. 20, 2020.

'Tesla speed'

China has been committed to widening the door to the world since it launched the reform and opening-up policy more than 40 years ago, especially after joining the World Trade Organization (WTO) in 2001. As China has become highly connected with the world, higher service requirements apply for foreign investors.

In the past, China mainly provided "hardware-based incentives," such as providing land and office parks to facilitate foreign investment. Today, in addition to those benefits, China offers more "software-based benefits" to improve its service quality for foreign enterprises, including simplifying the approval process and making use of big data in the service.

As the first wholly foreign-owned carmaker in China, Tesla delivered the first batch of sedans produced by its plant in China in December of 2019, less than a year after its gigafactory broke ground in Shanghai. Such rapid development was lauded as "Tesla Speed."

Without the support of the central and Shanghai governments, Tesla wouldn't be able to build a factory, and start mass production and delivery at such a speed, said Allen Wang, general manager of Tesla China.

"We treat foreign and Chinese companies equally without distinction. In 2021, we want to make the 'Tesla speed' apply to more enterprises," said Gu Changshi, director of the Investment Promotion and Service Center of Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone, where Tesla China is located.

Besides commercial vehicle enterprises, China has removed foreign ownership caps on sectors like securities, fund management, futures, and life insurance companies, according to the latest version of the negative lists for foreign investment.

Allianz China Holding was China's first wholly foreign-owned insurance holding company. "We now provide our customers in China with products ranging from life insurance, property insurance, pension insurance to asset management," said Chen Liang, deputy general manager of Allianz China Holding, CEO of Allianz China Life.

Removing the foreign ownership cap on life insurers will help improve efficiency, lower cost, and enhance IPR protection, said Zhou Tianyong, professor at the Party School of the Communist Party of China Central Committee.

China put into effect the landmark foreign investment law on January 1, 2020, providing institutional protection of foreign investors' interests. It grants foreign-invested enterprises access to government procurement markets through fair competition and bans administrative licensing and penalties for forced technology transfer.

IPR protection

Despite China's efforts and achievements in optimizing its business environment, it still takes time for foreign investors to digest the policies.

Liu Bin, an IPR lawyer of Beijing Zhongwen Law Firm, told Xinhua that although foreign companies have developed a deeper understanding of China's IPR protection than in previous years, their perception level is limited. Some foreign enterprises were still worried about the strength of China's IPR protection.

To ease their concerns, China has established an intellectual property court of the Supreme People's Court (SPC) in 2019 to promote law enforcement and judicial reform. The Chinese leadership has stressed the importance of improving the quality and efficiency of IPR-related trials, enhancing criminal laws and judicial interpretations, and intensifying efforts to crack down on IPR-related crimes.

The ceiling of statutory damages under the copyright law has gone up from 500,000 yuan to 5 million yuan. Based on court decisions in IPR infringement cases, the amount of damages is continuously breaking new records, benefiting the country's fight against IPR infringement, said lawyer Liu.

In recent years, it is not rare to see Chinese courts ruling in favor of foreign brands and enterprises in IPR-related lawsuits. It includes US basketball legend Michael Jordan's name rights disputes, British Broadcasting Corporation's trademark infringement case, and LEGO's copyright infringement case.

Also, the use of technology is becoming more common in IPR cases, with wider application of big data, AI, and blockchain in copyright registrations and copyright works.

FDI into the high-end sector of the country grew as the protection and service were strengthened. Data from the MOC Wednesday showed that foreign investment in high-tech sector increased 11.4 percent year on year and the high-tech services sector saw its FDI climb 28.5 percent year on year in 2020.

Battle 'decoupling'

Despite the shadow of the so-called "decoupling" theory and the threat of protectionism, foreign enterprises have recognized China's progress in improving its business environment. According to a survey conducted by the American Chamber of Commerce in Shanghai, 78.6 percent of the interviewed enterprises said they would not shift their investments away from China. Some other foreign companies adopted a "China+1" strategy, staying in China while establishing small-scale operations elsewhere, unlike the so-called "chain migration."

Partial chain migration does conform with the regular business logic that companies seek cheaper labor to lower costs. While the inflow of foreign investment focusing on cost-saving may slow down, more foreign investment centering on market-seeking and high-end manufacturing is entering the Chinese market, said Cui Fan, a professor at the University of International Business and Economics.

China has vowed to establish a "dual circulation" development pattern, in which domestic and foreign markets complement and reinforce each other, with the domestic market as the mainstay. The new development pattern is not a closed domestic cycle. Beijing's actions to foster an enabling business climate by meeting market needs are consistent with this development pattern.

Despite what China has done, rules on foreign investment security reviews, released by the Chinese authorities in December, have led some to link them to Chinese censorship on foreign companies and even retaliation for US sanctions against Chinese companies as a tit-for-tat battle.

However, the rules conform to international practice as many nations have review mechanisms for foreign investment. China has made it clear that the regulations aim to forestall and resolve national security risks while promoting and protecting foreign investment to support its higher-level opening-up.

Globally, China is actively cooperating with all countries, regions, and enterprises willing to cooperate in return. It signed the Regional Comprehensive Economic Partnership (RCEP) agreement in November and completed investment agreement negotiations with the Europe Union in December.

China's efforts to refine its business environment will never stop. "Shortening the negative lists and opening the door wider is becoming an important way to promote the new development pattern," said professor Cui.

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