Investing in the future: China’s opportunity to shape a better environment for investment

Raising-investmentMax Merkle, Business Manager for the European Chamber’s new Investment Working Group, provides an overview of China’s current investment environment.

China’s economic growth is decelerating and will, according to a number of expert opinions, likely be following an L-shaped recovery trajectory[2] over the foreseeable (forecasted) future. To ensure that this deceleration doesn’t lead to stagnation—let alone a Japan-style ‘lost decade’—increases in the productivity level of the Chinese economy are needed.

Such increases have to come from more productive investments. Achieving this goal is given great prominence in China’s 13th Five-Year Plan (2016-2020) (13FYP). To this end, the Chinese Government has laid out two industrial policies—China Manufacturing 2025 and Internet Plus—to harness new technologies, such as the informatisation of manufacturing. The full productive force of private investment, including foreign investment, will need to be harnessed if this aim is to be achieved.

It is therefore somewhat encouraging that the 13FYP talks about “opening development”, an increased openness to foreign investment.[3] ‘Somewhat’ must be used here, though, as such announcements have also been made in the past—most recently in the 3rd Plenum’s Decision—and yet the song remains the same: the current investment environment still holds an inherent bias against foreign participation. The European Chamber’s member companies attested to this in our Business Confidence Survey 2016, where 57 per cent of respondents stated their belief that foreign-invested enterprises (FIEs) tend to receive unfavourable treatment compared to domestic Chinese companies.[4] With its Foreign Investment Catalogue, China still prescriptively lays out the areas where investment is allowed, with many legitimate areas still being off-limits to foreign investment.

The (draft) Foreign Investment Law ((draft) FIL) that was published by China’s Ministry of Commerce on 19th January, 2015, is another case in point, even though it would represent a slight improvement over the status quo.[5] The (draft) FIL is intended to enable the legal system to treat FIEs equally to Chinese companies and contains several fundamental changes to the foreign investment regime. However, to have a separate law in place to ring-fence foreign investment in a negative and discriminatory fashion runs counter to the very idea of attracting foreign direct investment (FDI). In response to this situation the Investment Working has advocated in one of its position paper’s Key Recommendations that either the FIL be re-drafted so that it fully aligns foreign and domestic investors, or that it be replaced altogether with a new Company Law that applies equally to all companies, irrespective of whether they are domestic or foreign-owned. Either of these solutions would provide an even bigger boost to FDI because of the legal certainty it would give investors, although the latter would be preferable.

The same holds true for the (draft) Document on Market Access Negative List (Pilot) (MANL), which the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly issued on 12th April, 2016. It will initially be piloted in Tianjin, Shanghai, Fujian and Guangdong until the end of 2017, and then rolled out nationwide in 2018.

While a shorter version of the MANL applied nationwide should, on balance, be seen as favourable, it would substantially benefit China—as the second biggest economy in the world—not to have any restrictions on foreign investment at all. This becomes ever more apparent now that vast differences emerge between the transaction volumes of Chinese and European investors in their respective jurisdictions: whereas Chinese companies invested EUR 20 billion in the European Union (EU) in 2015—a 44 per cent leap compared to 2014’s EUR 14 billion[6]—over the same period the annual value of EU FDI transactions into China fell to EUR 9.3 billion, a drop of about nine per cent from 2014.[7]

The EU, owing to its economic size, predictable legal system and vast single market, now appears to be the more attractive destination for investment, particularly for investors seeking to acquire advanced technology. This is a trend that the competent Chinese government departments should look at carefully.

In conclusion, while China still has the opportunity to shape its domestic investment environment for the better, this should encompass an overall restructuring of the system it has in place to regulate foreign investment. Foreign participants can provide a much-needed impetus to China’s continued economic growth and ought to be allowed to play an integral part in this drive, in the same way that Chinese companies already do in the EU.


Introduction to the Working Group

The Investment Working Group was born out of the European Chamber’s Private Equity and Strategic M&A Working Group in March, 2016, in order to provide a lobbying platform for all European investors in China (foreign direct and portfolio investment). Its prime objective is to obtain a level playing field for European investors in China in terms of both regulation and market access. Addressing these systemic concerns is particularly important in light of the ongoing negotiations for the China-EU Comprehensive Agreement on Investment.

This is an open working group. If you are interested in joining the working group please contact Max Merkle at or +86 (21) 6385 2023 ext.104.

[1] This article is based on the European Chamber’s Investment Working Group’s forthcoming Investment Position Paper 2016/2017.

[2] An L-shaped recovery involves a sharp decline followed by a long period of flat or stagnant growth.

[3] 13th Five-Year Plan for Economic and Social Development of the People’s Republic of China, National People’s Congress, 17th March, 2016, viewed 19th April, 2016 <>

[4] European Business in China – Business Confidence Survey 2016, European Union Chamber of Commerce in China, 2016, viewed 28th June, 2016, <>

[5] People’s Republic of China Foreign Investment Law (draft), People’s Republic of China Ministry of Commerce, 19th January, 2015, viewed 25th April, 2016, <>

[6] A New Record Year for Chinese Outbound Investment in Europe, Rhodium Group, February, 2016, viewed 19th April, 2016, < Record_Year_for_Chinese_Outbound_Investment_in_Europe.pdf>

[7] Rhodium EU China Investment Flash, Rhodium Group, 18th January, 2016.