China’s Economy Needs Concrete Reform

This Op-Ed was published originally in the Wall Street Journal, Asia Edition, on 19th September 2017

Throughout 2017, the Chinese authorities have spoken strongly in favour of reforms that will promote economic globalisation and openness to the outside world. The reasons are pretty clear given the benefits China has accrued since its WTO accession in 2001 and its current need to increase foreign investment. While the European Chamber fully embraces these renewed pledges to open up, there is a distinct feeling we have been here before. They come less than five years after the Third Plenum’s Decision first saw the light of day, which ultimately failed to deliver on its own promises for deep and meaningful reforms. China therefore needs to send an unambiguous statement of intent by moving ahead with the measures that have been promised and by providing reciprocal access to its market, for both trade and investment.

During his much publicised January 2017 speech at the World Economic Forum in Davos, President Xi Jinping stated that China would expand market access for foreign investors and level the playing field to make China’s market more transparent and better regulated. Later that month saw State Council Document No. 5 released, which outlined plans to do just that. Additional details of plans to attract more foreign investment were then unveiled with the August release of State Council Document No. 39.

The European Chamber attaches great importance to these official statements, in particular the two State Council documents, which it views as the overarching, guiding principles for reforming China’s foreign business and investment environment in the short to medium term. Following through on its pledges will see China on its way to reaching its full economic potential. It will also surely improve its dismal 2017 OECD ranking of 59th place among the 62 countries evaluated on their openness to foreign investment.

With foreign investment in China declining year-on-year during the first half of 2017, it is Mats Harborn President of The European Union Chamber of Commerce in China China’s Economy Needs Concrete Reform clear that the authorities want to attract more. However, there is a right and wrong way to do so. European businesses make investments when capacities need to be established or expanded in response to market demand, not because an investment zone offering short-term financial incentives has been set up. If greater market access were to be granted, 56 per cent of respondents to the European Chamber’s Business Confidence Survey 2017 would be more likely to increase their investments.

Full implementation of the State Council documents’ commitment to fair competition would help to win over the doubters. It would also align with the European Chamber’s longstanding call for a level playing field to be established for all businesses in China. At the moment, this is unfortunately a dim prospect, particularly taking into consideration certain mergers of Chinese state-owned enterprises (SOEs) that have created enormous companies with preferential access to capital, and often markets. This untenable situation has allowed these SOEs to dominate domestically while muscling out international competitors.

There are some reasons to be hopeful, though, which give a glimpse of China’s possible future direction. For example, there have been significant improvements over the past year in the pharmaceutical industry, with authorities streamlining regulations and improving patients’ access to drugs. This positive approach should now be applied to other areas that are facing potential market closure, such as the agriculture, food and beverage industry. Starting from 1st October, shipments of food products, including some low risk ones, will require an official inspection certificate from a foreign government. As certification requirements for low-risk food products are out of line with international practice, this could lead to a dramatic reduction in food imports.

In July, the authorities did enact a new Foreign Investment Catalogue with 63 restricted or prohibited areas in effect nationwide. However, any perceived progress here is tempered by the fact that the length of the catalogue is still far too long. What’s more, the accompanying rules and regulations still maintain a distinction between foreign and domestic investment. It is highly unlikely that this kind of incremental change will result in the foreign investment tap being opened up. Amending China’s Company Law so that it applies equally to domestic enterprises and FIEs would have a far more profound impact.

The European Chamber hopes that after the 19th Party Congress the Chinese authorities will boldly proceed with implementation of the State Council documents and focus on concluding the ongoing negotiations for the EU-China Comprehensive Agreement on Investment. These actions would reduce both potential and current political tensions between China and the West, as we have previously pointed out.

Market-driven reforms are crucial to ensuring long-term and high-quality economic growth in China, and offering reciprocal access to its own market would be a major step in the right direction. The Chinese authorities clearly know what needs to be done, and the European Chamber looks forward to supporting them in their commitment to economic globalisation, and transforming well-intentioned words into tangible, positive change.

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