The Economist: Business in China

Mixed messages (an example of legal and political frameworks that affect FDI.)

A missed opportunity to improve the environment for foreign companies in China

Oct 1st 2016 | SHANGHAI | From the print edition

LI KEQIANG, Chinas prime minister, made a big promise to the worlds leading businessmen at the World Economic
Forums annual gathering in Davos in January 2015. It was that China would introduce a new legal regime for foreign
investment that would treat Chinese and foreign companies as equals. Its government has duly unveiled a set of
revisions to its foreign-investment laws that come into force on October 1st. The standing committee of the National
Peoples Congress adopted the laws earlier this month and bureaucrats have drafted detailed rules.

The revisions, and the extent to which they fulfil Mr Lis grand pledge, are an important indicator of how serious the
government is about pursuing other initiatives to liberalise rules on foreign investment. China is currently negotiating a
bilateral investment treaty (BIT) with the United States. American businesses hope it will lead to greater market access. A
BIT with Europe is scheduled to follow.

How, then, do the changes measure up? On the face of it, they involve a welcome shift away from the current regime,
which obliges foreign firms to win numerous approvals and is both burdensome and often influenced by domestic politics.
The new framework pursues efficiency. Instead of demanding approvals, it seeks to usher in a simpler, registration-based
system. Whereas the current approach is based on a long list of strategic industries in which foreign investment is either
restricted or off-limits, the overhaul promises to replace it with a relatively short negative list of forbidden investments in
areas such as defence and media. According to some, such as Hogan Lovells, a law firm, the reforms herald a sea-
change in Chinas foreign direct investment (FDI) regime.

Yet the revisions leave intact much that is wrong. China has kept a complex set of rules restricting inflows for decades. As
well as the long-standing practice of deeming many industries strategic, the government still requires foreign firms to form
joint ventures with Chinese companies and to hand over intellectual property via technology transfers. Repatriation of
profits is tightly controlled. And because the approvals-based approach is likely to persist, despite official promises, every
foreign investment is subject to the vagaries and corruption that comes with a one-party, highly bureaucratic state.

Most glaringly, there is nothing in the new changes that genuinely places foreign firms on an equal legal footing with local
ones. The EU Chamber of Commerce in China dismissed the new reforms as not bold enough. It issued a thinly veiled
warning that the EU may make it harder for Chinese to invest in Europe.
Another big omission is the governments failure to tackle the problem of offshore legal structures known as variable
interest entities (VIEs). Foreign investment is banned in Chinese internet companies, but by getting foreigners to put
money into VIEs to which the Chinese firm promises to pay dividends, many firms have got around this ban. A proper
reform would have ended the ambiguity surrounding these vehicles. It was not forthcoming.

The tape is red

There are already signs of bureaucratic resistance even to the governments modest revisions. It is questionable, for
example, whether officials will accept the shift from an approvals-based scheme to a registration system. Bureaucrats at
the top economic planning agency, the National Development and Reform Commission, are said to reject the idea that the
approvals-based system is coming to an end. They say the new rules are just a modification of the existing approach to
foreign investment.

Meanwhile, multinationals are no longer clamouring to put money into Chinas slowing economy. FDI has been flooding
into the Middle Kingdom for two decades. Inbound direct investment reached a peak of nearly $300 billion in 2013 but has
cooled off since. Foreign inflows are slowing just as Chinese outward investments are skyrocketing (see chart). It seems
exactly the right moment to roll out the welcome mat, but the changes going into effect fall well short of what
multinationals had hoped for. As Jake Parker of the US China Business Council, a lobby group for big American firms,
points out, Chinese leaders have talked about lots of reforms but the lack of implementation has created uncertainty
about the policy direction and undermined confidence.

From the print edition: Business

1. Who is Chinas prime minister (fall 2016)?

2.

3.
Who is

The People's Bank of China (PBC or PBOC, Chinese: , zhongguo renmin yinhang) is the central
bank of the People's Republic of China: Zhou Xiaochuan

Ministry of National Defense of the People's Republic of China

The MND is currently headed by Minister Feng Shih-kuan.

Defense Ministry's regular press conference on September 29 ... to Senior Colonel Yang Yujun, spokesman
for the MND of the PRC on Septe
Chinese male supermodel Zhang Liang.