China Eases Foreign Investment Restrictions to Open Economy
Xu Yunfeng
DATE:  Jan 11 2018
/ SOURCE:  Yicai
China Eases Foreign Investment Restrictions to Open Economy China Eases Foreign Investment Restrictions to Open Economy

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(Yicai Global) Jan. 11 -- As a new vehicle for economic opening, free-trade areas (FTAs) are tasked with pioneering new economic and administrative reforms. The Chinese government has constantly trimmed 'negative lists' of restrictions imposed on foreign investors.

The country's cabinet, the State Council, recently adjusted administrative regulations in FTAs and lifted foreign investment restrictions for various sectors ranging from civil aviation, entertainment, finance and tourism to education and rail transit construction and operation. Foreign investors are now allowed to set up wholly-foreign owned enterprises (WFOEs) in the entertainment and gas station construction and operation markets. Restrictions on rice, wheat and corn purchase and wholesale businesses have been abolished, and the internet service market has also been opened to foreign businesses.

China is bound by the terms of its accession to the World Trade Organization (WTO) to develop an open economy. Ever since its inclusion in the intergovernmental organization, the country has fulfilled its obligations in strict compliance with WTO rules, and contributed substantially to the multilateral trade system. The US and several other Western nations have, however, slighted China's efforts to honor its promises as a member of the WTO. Instead of improving WTO rules, they have become reactionaries and caused serious setbacks in international trade development.

China's economy has developed swiftly since the introduction of economic reforms 40 years ago. Economic opening deserves much of the credit for this remarkable achievement. China has benefited, more than most other countries, from economic globalization. Affording foreign businesses easier market access shows the Chinese government is bound and determined to push ahead with the economic opening strategy and to maintain the momentum for economic globalization. This will benefit all nations in the world, including China itself.

Continuous economic opening and relaxing foreign investment restrictions in competitive sectors is dictated by the need to improve the quality of economic development. In other words, easing restrictions for foreign investors and introducing healthy competition will help the country enhance the overall standard of its service industry and facilitate industry upgrade, thereby driving the transition in the economic growth model.

National policymakers have decided to create a new system based on an open economy. The rationale behind the decision is that economic opening can improve the institutional, legal, business and innovation environment in China, reduce costs, enhance market efficiency, and ultimately enhance the competitiveness of Chinese companies on the global market. To this end, the government needs to attract more foreign investment to further optimize resource allocation and advance market-oriented reforms. This is the reason the central government has proposed to lift market access and equity ratio restrictions for foreign investors in such competitive industries as general manufacturing and services, and foreign investment negative lists piloted in FTAs will be implemented on a nationwide scale as early as possible.

To adduce the financial sector as an example, in the past, a foreign bank had to have been in operation for at least one year to qualify for yuan businesses. This requirement has been abolished after the recent policy adjustment, and foreign banks are entitled to the same treatment as their Chinese counterparts, in line with the government's appeal to expand financial market deregulation during the national financial conference last year. The government's financial deleveraging drive has produced initial results, and systemic financial risks have abated. The yuan has stabilized against the dollar. This fosters favorable conditions for further opening the financial sector to foreign investors.

In addition, deregulating yuan businesses can increase the diversity of the Chinese financial market and therefore push the market-based reform of the exchange rate formation mechanism.

The good news is that China's appeal to foreign investors has improved. The decline in foreign investment reversed itself over the first 11 months of last year. A total of 30,185 new foreign companies were established during the period, and paid-up foreign investment (excluding investment in the banking, securities and insurance markets) totaled CNY804 billion, marking year-on-year increases of 26.5 percent and 9.8 percent, respectively. As a reflection of the improving industry structure, foreign investment in the high-tech sector swelled by 66 percent. Its contribution to the total amount rose by 10 percentage points to 29.5 percent.

While promoting economic opening and attracting foreign investment, the government has also intensified efforts to create a more favorable business environment as another top priority. Some local governments have failed to significantly improve the local business environment in recent years, despite the central government's call for effective market deregulation and decentralization. They must deepen institutional reforms and create a market-oriented, internationalized business environment based on the rule of law to attract more businesses at home and abroad.

The Chinese government stressed in the report of the 19th National People's Congress that China will never close the door to foreign businesses, and pledged that the door will open wider in future. Driven by a series of new policies, economic opening will reach a new level in the country in the coming years.

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Keywords:   Foreign Investment