From the dawn of the reform era in 1979, one of China’s best cards in attracting foreign investment has been policy momentum. No matter how bad the problems were at any given moment, you could pretty much count on tomorrow bringing improvement in the business climate. Even the 1989 Tiananmen Square massacre only briefly interrupted progress.
Until now, that is. Evidence is building that China’s business environment is at a tipping point. Since the global financial crisis, Chinese officials have begun to display open hostility towards some foreign enterprises, with American and European Chambers of Commerce reporting rising pessimism among their members. And while many foreign businesses continue to thrive in China, the presumption that economic liberalization is a one -way street is fast coming unstuck.
One explanation is hubris: As developed countries have been laid low by their supposedly overly deregulated financial sectors, Chinese leaders have, the thinking goes, started to believe that they have the superior economic model and can develop without foreign help.
A more compelling explanation for the turn in Beijing’s behaviour is that it wants to slow the pace of foreign direct investment (FDI). China’s problem is not a shortage of capital but a surplus. There is an endless flow of capital trying to get in, some of which is hot money disguised as FDI. Given the strains this is putting on the central bank, it’s no wonder that the government is becoming pickier about projects.
It’s also true that Chinese leaders are increasingly holding firm when it comes to reciprocal treatment. The political problems Chinese companies faced making acquisitions abroad have soured regulators on allowing multinationals free rein to buy local firms.
But none of these explanations can elide the fact that as multinationals increasingly look to the Chinese domestic market for growth, they are competing with Chinese companies. These firms are often state-owned, and even the private firms will usually have better relations with government departments than their foreign counterparts. Corruption, vested interests and local protectionism all make the China market difficult. But now there is a growing sense in the foreign-business community that China is taking a turn to the kind of crony capitalism that has typified the direction of the Russian economy.
For instance, the European Chamber of Commerce has complained that contracts for wind power were rigged to favour Chinese producers. In telecommunications, regulators likewise set the industry standards to disadvantage the multinationals. In the auto industry, officials have set the goal of increasing domestic companies’ market share by 6 percentage points over the next five years.
In the most egregious case of protectionism, a proposed set of guidelines for government procurement late last year required that products contain intellectual property “totally independent of overseas organizations or individuals”, effectively excluding foreign companies in the name of “indigenous innovation”. Earlier this month Beijing backtracked a bit, but the playing field is still far from level.
Perhaps the most disturbing aspect of all this is that the lack of a rule of law makes it impossible to get a fair hearing when the decisions of individual officials violate the law or national policy. Foreign firms may occasionally win court judgements in disputes with their Chinese counterparts, but judges will never overrule a Communist Party official’s say-so, since they report to the party themselves.
All this bodes ill for China in the long term, even if foreign businesses continue to take their chances at the roulette table of China’s legal and regulatory systems. Unless Beijing shows the will to restore faith in reform momentum, it will be China that will pay the price.
THE WALL STREET JOURNAL
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