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Intensifying Debate over the “Deteriorating Chinese Investment Climate” (Part 1)

Jianmin Jin
Senior Fellow, Economic Research Center

June 7, 2010 (Monday)

American and European Chambers of Commerce: “Bullish on investment returns, but legal environment is deteriorating”

China achieved a V-shaped recovery from the financial crisis through aggressive government spending and policy to supply massive amounts of loans. US and European countries, meanwhile, face huge trade deficits with China, and are demanding that the yuan be appreciated. For US and European companies, however, more concerning than the yuan issue is the deteriorating investment climate in China. On behalf of western companies in China, the American and European Chambers of Commerce in China assert that “the investment climate in China is in a declining trend.”

These Chambers raise the case of China’s “Indigenous Innovation Policy,” which puts technology and products developed overseas at a disadvantage. The policy gives preferential treatment only to intellectual property and brands developed in China (regardless of whether the company itself is domestic or foreign) through government procurement incentives. Chinese government procurement reached US$87.7 billion in 2008—of this, the areas covered by the “Indigenous Innovation Policy” (personal computers and peripherals, communication facilities, OS devices, software, and green products) are estimated at several billion dollars. Foreign companies are concerned that this policy will shut out foreign products.

On March 22, 2010, the American Chamber of Commerce in Beijing announced the “Innovation Policy Survey” targeting US companies in China. According to the survey report, 38% of respondents feel they are becoming “unwelcome in the Chinese market,” a significant jump from 23% in 2008 and the worst result since 2006. Moreover, 43% of all surveyed companies and 57% of high-tech and IT companies in particular feel “China’s ‘Indigenous Innovation Policy’ will have a negative impact on business.” This policy is in fact limited to certain fields and has not yet been fully implemented, yet 28% of respondents say they have already been affected.

On April 2, 2010, the American Chamber of Commerce in Beijing announced the 12th “Business Climate Survey” that gauges the overall investment climate in China. US companies are optimistic on their business in China (82%) as well as company development over the next year five years (91%), the highest such level since 1997. In addition, despite the financial crisis 71% of respondents turned a profit and 46% enjoyed higher margins than the global market in 2009. Given this profitable climate, 80% of US companies plan to increase investment in China.

Though these companies maintain a sanguine outlook on the economy and profitability in China, problematic areas remain. For the first time, respondents rated “inconsistent regulations among regions” (31%) ahead of “lack of managerial human resources” (28%) as their strongest challenge. Concerns also increased over “difficulty in obtaining patents” (third, 24%); “protectionism” (fourth, 23%); and “intellectual property infringement” (eighth, 19%). The American Chamber of Commerce has expressed concern regarding this messy legal environment as well as the rise of protectionism as evident in the “Indigenous Innovation Policy.”

European Chamber of Commerce: “Reform and opening-up policy is stagnating and restrictions on foreign capital are growing”

European companies in China are also concerned with the deteriorating investment climate. The European Union Chamber of Commerce in China (Beijing) published the “European Business in China Position Paper 2008/2009” on September 2, 2009. The paper highlights concerns among European companies that the investment climate in China is worsening. Specifically, while the Chinese market is more important than ever, China’s reform and opening-up policy has slowed since the financial crisis and government intervention in industry and restrictions on foreign companies have been increasing, leaving certain industries in a serious predicament. The “European Business in China Position Paper 2008/2009” offers over 500 policy recommendations at once, an unusually high number. More than half of the surveyed European companies assert that creating a “fair environment for competition” and “reducing monopolies” are most important in terms of Chinese policy.

The concerns of European businesses focus on market access, legal and political transparency, and protection of intellectual property rights (IPR). These companies express dissatisfaction with new policies favoring Chinese companies such as increasingly disparate treatment of domestic and foreign companies in terms of government procurement since the financial crisis; exclusion of foreign companies through technical standard and certification systems such as the “Indigenous Innovation Policy”; and demands that energy be produced domestically. Regarding the transparency of policy, the unfair application of laws among domestic and foreign companies has emerged as a big problem. For example, 54% of survey respondents assert environmental restrictions are “applied strictly” on foreign companies, while 18% say they are “applied weakly.” In contrast, only 7% replied that the same restrictions are “applied strictly” on domestic companies, while 66% agree they are “applied weakly.” In addition, placing unnecessary demands on companies to disclose technological information is adding to concerns over technology leaks. These concerns are directly related to new laws and policies, and are seen as proof of the worsening investment climate in China.

Western media fanning the flames of debate

Media in Europe and the US are putting pressure on the Chinese government by fanning the flames of the “Chinese investment climate” debate. Western media has broadly covered the worsening Chinese investment climate by associating the aforementioned issues with, for example, the arrest of four workers of the mining and resources giant Rio Tinto; Google’s withdrawal of its search business in China; and artificial exchange rate policy (the yuan problem).