International Law

A China That Can Say "Whatever."

By Dan

China Economic Review is just out with an article by co-blogger Steve Dickinson entitled,"Calling their bluff." The subtitled explains the article: "Foreign investors are queuing up to criticize China, but Beijing knows they aren't about to leave, says Steven M. Dickinson."  

Steve starts out by citing to the recent rash of foreign companies criticizing China government policy towards foreign investment and asks whether this suggests "foreign investors, tiring of China, will turn their attentions elsewhere?"

Steve notes how the "current unease" by foreign companies stems from Beijing's having become "more willing to intervene in the economy."  China justifies its intervention by "citing the success of China in weathering the storm of the world economic crisis." Steve sees this intervention, which is usually to the detriment of large foreign companies, as the "real China," which is going to keep foreign companies in line:

To put it more simply, foreign MNCs are being forced to confront the "real China." The China that many of them first encountered, before the WTO-mandated opening of the doors to foreign direct investment, was a sanitized version of commerce. Foreign investment in the country was limited to a handful of special economic zones where local officials welcomed overseas companies as a source of employment, funding and technical information. These investors operated under special regulatory regime, carefully isolated from what was going on outside. 

Moreover, during that period central control over foreign investment projects was weak. Investors were often able to ignore national law as irrelevant to their activities in China.

The cozy arrangement began to slip away in 2006. In return for wider market access, Beijing now demands that foreign investors operate by its rules. The days of operating outside the Chinese legal and regulatory system are over - the dream that China had become "more capitalist than the capitalists" and was a paradise free of intrusive government regulation has been exposed as hollow.

What foreign MNCs now encounter is the same business and investment environment faced by all private firms operating in China, characterized by: a centrally planned economy; general hostility to private enterprise; SOEs benefiting at the expense of private business; extensive government intervention and regulation; complex regulations that constantly change direction in unpredictable ways; and political objectives taking precedence over economic objectives.

These conditions are difficult for Western companies to accept, but their complaints to Beijing are and will continue to be ignored. Beijing is acting according to its master plan and it is not going to be swayed:

None of this occurs by accident in China - it is all part of a carefully devised government policy. The Chinese believe that the economic growth and stability that attracted foreign investors to the country in the first place is a direct result of the centrally planned and highly regulated system. They find it illogical that foreigners would criticize the very policies that have created an investor-friendly environment. 

Therefore, when confronted by these expressions of discontent, officials have made it very clear that they do not intend to make any changes. Their position is that foreign investors must come to China on China's terms. If these terms are unacceptable, the foreigners can stay home or go home.

Beijing does not take seriously the leaders of large foreign companies that have started criticizing China and threatening to invest elsewhere. "Beijing sees this threat as a bluff" as it "believes foreign companies need China far more than China needs them, and so the country's attractiveness as an investment target far outweighs its disadvantages."

Steve goes on to point out that though China "maintains significant barriers to foreign investment, it is nevertheless by far the most open investment environment in Asia and among the most stable." It also offers large numbers of workers, a well developed factory and retail construction market, and a reliable and cheap energy supply and modern transportation infrastructure that "allow for production and retail projects in China on a scale far larger than any alternative in the world." It is also "home to a rapidly growing yet relatively underserviced consumer market for the increasing number of foreign firms that want to sell their goods domestically."

Steve concludes his article by noting how China's leaders have called the MNC's bluff:

China's leaders are confident the country will remain a primary investment target and foreign threats to move their operations elsewhere are simply a bluff. And so, with no small degree of nonchalance, they have called it.

I tend to agree. Companies have and will continue to complain about China and there will be some companies that move some operations elsewhere, but unless China tightens the screws against foreign companies considerably more than it has to date, I do not see foreign investment into China slowing down much, if at all. 

What do you think?

Full post as published by China Law Blog on September 10, 2010 (boomark / email).