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A Closer Look at China’s Foreign Investment Law

Without too much fanfare, China’s new Foreign Investment Law passed in March last year has now come into effect as of 2020.

Almost a year ago, a draft of the law had been sitting relatively untouched since 2015 before it was unexpectedly rushed through for approval. Many commentators viewed this passage as a quick “give” by China to the US in the middle of tense trade discussions. The text of the law was vague, but a common refrain was to wait for implementing regulations for more details. While various agencies have issued specific implementing rules in the meantime, the general implementing rules passed in December of last year were still lacking the specifics many of those commentators had hoped for.

In my previous article, I addressed the major tenets of the law and their expected impact. With the benefit of time and the implementing rules now in place, let’s address here why the law is still so vague and who the real target audience for the law is in and out of China.

Whereas in years past, foreign investment was traditionally seen as a driver of internal competition, technology development, and general GDP growth, now Chinese companies are more competitive and developing their own technology, so foreign investment has generally been less and less important as a driver of that much-hyped annual GDP growth number. Even though China is quite anxious about the slowing economy, it is still looking to domestic consumption to fill GDP growth gaps, not to trade and foreign investment. In that respect, domestic consumption in 2020 is being driven by Chinese, not foreign, brands.

Today, China is no longer looking for an import substitution policy to protect and build national champions for independent, long-term economic growth. Companies such as Alibaba, Tencent, Baidu, Huawei, and others are key drivers of the economy today. However, being that driver is independent of the fact that they are Chinese. Most Chinese tech companies, especially internet companies (Baidu is perhaps the notable exception), no longer need protection to hold off external competitors for the local China market. Rather, foreign competition is instead being disfavored because that competition cannot as easily be controlled. It is a slight but important distinction. This desire for control is not so dissimilar to the souring of US attitudes towards increased market access for Chinese data-rich technology companies like Bytedance (TikTok).

Make no mistake – in some areas foreign investment is being heavily courted, and this law is meant to address that real need. The manufacturing regions outside of greater Shanghai and along the southern coast are hurting from the relocation of manufacturing to Southeast Asia, etc., and anecdotal evidence is abundant of regional development zones making a much more aggressive push for foreign investment to fill the gap of companies exiting. This law indeed does try to send a high-level message to global manufacturing CEOs to try to convince them to stay. And, of course, it equally serves as a message to such local development zones and others that the government hears their pain and is trying to work in their interest.

In fact, the deliberate vagueness of the law and its implementing rules is actually meant in some ways to give local authorities more autonomy to accommodate foreign investment within certain goal posts. While previous ambiguity has caused regulators to sit on their hands and not take risks in dealing with foreign investment approvals, there exists anecdotal evidence of foreign-invested companies being approved in record time leading up to and following this Foreign Investment Law taking effect. In other words, the message to local authorities suffering from the withdrawal of manufacturing is to do what you can within the broad framework we have established, and we will support you to put those things in place.

While the law is meant to address the concerns of local investment authorities as much as it is to address the concerns of Fortune 500 CEOs, the law itself should not be seen as placating or changing the hearts and minds of Congressmen, nor does China expect that it will. On the global diplomatic stage, attitudes will only continue to harden despite this law or the Phase One trade deal being agreed to.

Instead, I would argue, the true audience for this law is other countries in Europe and Southeast Asia. The objective is to get ahead of the curve in preventing officials in those countries from becoming as agitated as US Congressmen in restricting Chinese companies to buy or invest in foreign technology or enter those markets. The law should be seen not as an attempt to avoid US trade tariffs but as a means of convincing bystanders that China and Chinese companies are not an institutional threat. It is being delivered to an audience that is still arguably on the fence in the US-China dispute but starting to tilt over to the US position.

Despite the lack of specifics, intent as embodied in broad principles and statements captured in headlines about the new foreign investment law still matters. This message and the perception of Chinese companies, which I have written about previously, is critical to ongoing efforts to globalize Chinese companies with the scale, technology, and know-how to compete first in class with western multinational companies.

Perhaps most importantly, as most people doing business in China for a long period of time are aware, more specifics concerning the law would not necessarily correlate to what actually gets enforced. Ironically, this problem is not unique to foreign companies in China. Complaints, for example, about exposing technology to business partners and the China ecosystem in general are common among domestic establishments that increasingly use their own unique IP. It is a consequence of the lack of development of enforcement mechanisms which sufficiently deter such behavior; no amount of rules will solve that problem.

China’s new Foreign Investment Law is a positive statement with a specific audience in and out of China. The impact such law can make is directed not so much by the words the law contains so much as the local factors on the ground. It is best understood as part of a macro-level diplomatic strategy in a world where Chinese companies are starting to enter external mature markets. This is going to be a long and protracted “discussion” at the global stage, and this law is merely a small part of that bigger discussion.

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