The Two Negatives Aren’t a Positive

negative-list-webAs China’s economy continues to slow, European businesses operating there are increasingly asking a question that you might not expect of a country that’s clearly in need of further high value-added investment: how welcome are we here? On 1st December, this conundrum was brought into sharp focus by the Chinese Government’s release of the new roadmap on where investment is and is not wanted. This roadmap maintains the principle of two so-called negative lists: one governing domestic enterprises and another for their foreign-invested counterparts.

In principle, a short negative list would create clarity for all investors by explicitly outlining areas where investment is not permitted. For all items not included in the list, it would no longer be necessary for companies to apply for approvals with little foreknowledge of what will or will not ultimately be accepted. As desirable as a single negative list would therefore be, the establishment of two separate lists will only cement unequal treatment in place.

At best, this sits uneasily with the landmark commitment made in the Third Plenum’s Decision to allow the market to play the decisive role in the economy. Furthermore, as the list for foreign-invested enterprises is to be released at a later date—and may only come into force in 2018—European businesses may not see substantive improvements in China’s restrictive business and regulatory environment any time soon.

In light of China’s unprecedented economic development over the last 35 years, it isn’t clear why unequal treatment should still even be seen as necessary or desirable. Is it due to lingering worries about the ability of Chinese companies to compete? If so, the fact that the ever-expanding flow of Chinese investment into the EU—funds that are roundly welcomed for the jobs and economic growth that they create—has dwarfed the now declining scale of European investment going in the opposite direction should have made it clear that they can.

Is it intended to support the Made in China 2025 initiative, which encourages advanced manufacturing and the next stage of economic development? If so, the yet-to-be implemented procurement restrictions for the banking and insurance industries, announced in December 2014, seem to signal an intent to promote national champions by depriving domestic and foreign companies alike of the most competitive IT solutions.

This is not the most effective approach to fostering innovation. In fact, China is now home to world-class private enterprises that successfully compete at home and abroad. This should provide sufficient reason for it to confidently welcome the benefits that competition creates for growth, innovation and the purchasing power of its growing middle class. Against a background of difficult WTO negotiations, and a smaller group of key countries having already signed the Trans-Pacific Partnership, economic relations with the EU are more important to China than ever before. Chinese leaders themselves should therefore be debating a new question: why aren’t we allowing European businesses to make larger contributions to the growth and innovativeness of our slowing economy? At this crucial juncture, the EU-China Comprehensive Agreement on Investment is an irreplaceable opportunity to enlist European investment for the cause of China’s continued economic success.

China is no longer the world economy’s only major engine of growth. European businesses with mastery of global best practices, advanced technology and plans for high value-added investments now have other attractive options in more open and predictable markets like the US. In response, and instead of maintaining discriminatory treatment, the Chinese Government should be doubling its efforts to create the conditions that will attract the attention of these most desirable of investors. As the OECD has ranked it in last-place among the 55 countries included in its Foreign Direct Investment Regulatory Restrictiveness Index, this is an area where China can make major improvements.

Ultimately, if China is to avoid the middle income trap and reach its goal of becoming a highly innovative economy by 2025, bold reforms—not half measures that protect vested interests—are necessary. This is further necessitated by the fact that the country’s ‘golden age’ of double-digit growth that resulted from the boom in investments in infrastructure and a demographic dividend has reached its conclusion. Under these new conditions the continuation of a prolonged, discriminatory regime for foreign companies can only be described as a self-defeating measure. The treatment that European investors receive in China during the coming years will therefore reveal how far it wishes to take the bilateral relationship with the EU, and whether the Chinese Government wants to see European companies succeed.

It should also be kept in mind that the Chinese Government is entirely capable of bringing unequal treatment to a prompt end as well as negotiating an ambitious, comprehensive bilateral investment agreement. Whether it’s been in joining the WTO, taking on corruption or pulling hundreds of millions of its citizens out of poverty, we have seen China succeed at the tasks that it has set its mind to, again and again. European businesses look forward to playing a central role in China’s next big success story.

electronic signature of Mr Wuttke






Jörg Wuttke

European Union Chamber of Commerce in China