Is China Saying 'No' to Foreign Investment?

Recent press coverage regarding China's reaction towards foreign investors seems to suggest a 'backlash' against foreign competition and that the Chinese may now be saying 'no' to foreign investment. This possible reversal in position has raised concerns amongst investors who fear that China's apparent change in tone towards foreign investment, would drastically affect approval procedures, making it significantly more difficult for foreign investors to enter the China market.
 
Two recent high-profile cases which have foreign investors abuzz include a majority stake sale of a large domestic construction company to a US group and the acquisition of a controlling share by a foreign financial consortium of a local commercial bank. In both cases the Chinese government intervened to prevent the companies from falling into 'foreign hands'.
 
However, investors are reminded that China has always maintained a closed-door policy for prohibited sectors and foreign involvement in the merger and acquisition of large state enterprises is well-guarded.
 
In fact, China's economy has been a veritable sponge for foreign investment since the early days of its liberalization. Today, foreign investors can set up Wholly Foreign-Owned Enterprises with previous barriers to entry constantly being reduced, as can be seen in China's amended Company Law that came into effect on 1 January 2006, which lowered capital requirements to encourage investment from smaller foreign companies.
 
The key area where there has been a noticeable policy shift has been from a focus on attracting quantity to quality of investment capital. In a 20 page document published by the National Development and Reform Commission (NDRC) on 9 November 2006, China now seeks to attract investments that promote environmental protection, bring in new, 'high-end' technologies, or that focus on research and development. Nevertheless, this is not to say that low-value export type investments will be discouraged as investment in these labor-intensive industries serves to create further employment opportunities.
 
However, as always in China, there is the duplicity of what constitutes desired investment. Just days after the 9 November announcement, the China Banking Regulatory Commission announced new rules for foreign banks allowing them to compete directly in the domestic market with local banks. Perhaps not good news if you are a domestic banker in China. To incorporate locally, these foreign banks must have USD10 billion in assets, have RMB1 billion in registered capital of Mainland operations, and provide a minimum of RMB100 million for each branch opened. Not small numbers at first glance, but already 10 foreign banks are queuing up behind one another to incorporate. Considering these lenders make up approximately 50 percent of local assets of international lenders on the Mainland - the implications are considerable.
 
With those sorts of numbers, we don't see China saying 'no' just yet... keep watching this space!

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Offshore

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