Credendo: the New Foreign-Investment Law Could Be A Major Milestone In The Quest For A Fragile Trade Deal With The Us

Wednesday, April 10, 2019
Credendo: the New Foreign-Investment Law Could Be A Major Milestone In The Quest For A Fragile Trade Deal With The Us

While its economy could be progressively stabilising after months of sharper deceleration, Beijing is actively trying to ease trade tensions with the US for an extended period in order to get more predictability and improve economic prospects. This year’s long and erratic bilateral trade negotiations could eventually deliver a deal albeit fragile. A possible outcome would be that China commits to importing higher volumes of US goods and to not levying higher tariffs on US cars to reduce its large goods trade surplus with the US. More crucially, the US is struggling to receive guarantees about the end of perceived unfair treatment for foreign investors in China. Beijing has already unveiled measures – although not explicitly correlated – aimed at meeting US demands. That’s the case for the FDI law reform the National Congress passed mid-March and which could lead to progress on multiple fronts. The new law provides that local investment rules can no longer diverge from central ones, the national treatment will be applied to foreign investors, thus potentially putting an end to the mandatory joint-venture rule for foreign investors setting up a business in China. They would also get better access to the internal market, enjoy stronger intellectual property rights and the ‘forced technology transfer’ would become illegal. Several courts of justice are to be set up to deal with future disputes around those issues. FDI inflows could benefit from this new reform which will come into force as from 2020.

This reform adds to liberalisation measures the Chinese authorities have taken over the past year. Market access for foreign investors has been made easier in the financial and insurance sectors whereas the government has recently pledged to ease financing access for private companies and support their innovation especially in strategic industries. Moreover, Beijing plans to continue the SOE reform by making SOEs more efficient and allowing minority private-capital participation in many sectors deemed to be strategic such as high tech. More generally, the SOE reform is also a necessary step to improve the financial sustainability of a majority of loss-making and highly indebted SOEs.


The Chinese authorities seem determined to move forward in making many industries more open to foreign investors and better protecting their rights. The more pronounced soft landing of the Chinese economy, especially in the job-intensive export sector, probably explains those multiple moves in a rare short period of time. US pressures seem to slowly start bearing fruit as the impact of higher import tariffs is increasingly harming China’s economy and jobs. This is happening in a context – although nearly on hold in the short term – of a harmful deleveraging policy as seen in 2018 with a record number of corporate defaults. Beijing could gradually come to the conclusion that the good years of preferential trade treatment are over and that it is time to adapt to a new global economic and trade reality. With a current account surplus expected to move into deficit in the LT, China will have to attract more FDI and portfolio inflows. It also matters to support a slowing GDP growth in the LT. Hence, extra steps towards higher economic liberalisation and improved investor environment are to be taken to boost weakened FDI. As always, although new laws are welcomed by foreign investors, they remain cautious as implementation is a recurrent issue in China. The same could apply to the new FDI law. Moreover, the lack of details, a range of exceptions and loopholes, particularly the reference to national security interests (echoing the broad use of this concept under Trump’s US trade policy) and a yet to be announced negative list of sectors where foreign investment is restricted could mitigate the seemingly positive overall impact in practice. Still, the context is unusual with rare US trade pressures combined with China’s economic difficulties which could help deliver more tangible results. Now, it remains to be seen whether US negotiators will be convinced by China’s concessions, the monitoring of their potential compromise and whether they will agree on Beijing’s demand of removing higher US import tariffs and the threat of future punitive tariffs.

Whatever comes out of trade talks, China’s state capitalism in which large banks are under state control and massive subsidies are granted to the still dominating SOEs, the growing communist party’s political penetration in the corporate sector and China’s world economic leadership goal starting by the high-tech industry are all unlikely to be questioned under Xi Jinping’s unlimited mandate and will remain the pillars of China’s future economic policies. Therefore, conflicts with the US on economic and trade issues are likely to persist, certainly as far as high-tech development – highlighted by the ‘Made in China 2025’ industrial project that aims to make China leader in ten strategic high-tech sectors – is concerned. As for commitment to improving conditions and support for private companies, progress is probable but could continue being hindered by Xi Jinping’s ideological inclination to give primacy to SOEs as the country’s key economic players.

Fonte: Credendo