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China applies a restrictive investment regime

China seeks to protect many domestic industries through a restrictive investment regime, the United States Trade Representative (USTR) highlighted in a recent report.

The Chinese economy grew 8.1% in 2021, partially driven by the low base effect in 2020. Total consumption, a combination of household (39% of GDP) and government (17% of GDP) spending, contributed 6.4 points percentage (% pts), followed by net exports (2.4% of GDP) with 1.9% pts, and investments (42% of GDP) with 1.5% pts.

However, sequential (seasonally adjusted) growth rates remained subdued in the first nine months of 2021 (0.2 to 1.2% qoq) and were notably weaker than the long-term average of 1.8% qoq.

According to the USTR, many aspects of China’s current investment regime continue to cause serious concerns to foreign investors.

For example, he argued that China’s Foreign Investment Law and implementing regulations, which came into force in January 2020, perpetuate separate regimes for domestic investors and investments and foreign investors and investments and invite opportunities for discriminatory treatment.

Investment

In January 2020, the United States and China signed an economic and trade agreement, commonly known as the “Phase One Agreement.”

This agreement included commitments by China to improve market access for the agriculture and financial services sectors, along with commitments related to intellectual property and technology transfer, and a commitment by China to increase its purchases of US goods and services.

The USTR also questioned that there has been a lack of substantial liberalization of China’s investment regime, evidenced by the continued application of prohibitions, caps on foreign capital and joint venture requirements and other restrictions in certain sectors.

China’s latest version of its Foreign Investment Negative List, which came into force in January 2022, leaves significant investment restrictions in place in a number of areas important to foreign investors, such as key service sectors, agriculture, certain extractive industries, and certain manufacturing industries.

Services

With respect to service sectors in particular, China maintains prohibitions or restrictions on key sectors such as cloud computing services, telecommunications services, film production and distribution services, and video and entertainment software services.

China’s Foreign Investment Law, implementing regulations and other related measures suggest that China is pursuing the goal of replacing its case-by-case administrative approval system for a wide range of investments with a system that would only apply to “restricted” sectors.

However, as of March 2022, it is unclear whether China is fully achieving that goal in practice.

Furthermore, even for sectors that have been liberalized, the possibility of discriminatory licensing requirements or discriminatory application of licensing processes could make it difficult to achieve meaningful market access.

The potential of a new and overly broad national security review mechanism, and the increasingly adverse impact of China’s Cyber ​​Security Law, Data Security Law, and Personal Information Protection Law and related implementation measures , including those that restrict cross-border data flows and impose data localization requirements, have serious negative implications for foreign investors and investments.

Foreign companies also continue to report that Chinese government officials may condition investment approval on the requirement that a foreign company transfer technology, conduct research and development (R&D) in China, meet performance requirements related to export or use of local content, or make valuable, treat specific trade concessions.

 

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