Next Decade: Golden Chance to Re-invest in China
By Edwin Li
Beijing Dacheng Law Offices, LLP
It is a must for both China and US leaders to meet during the APEC summit in San Francisco in order to find solutions for their domestic and global challenges.
Reliance on international market is the key to revive China economy. China has to persuade US to give up or soften at least its confronting/de-coupling/de-risking policy against China before China can go back to the global market as free as before, hopefully. China economy is being dragged down by instability of the real estate market and the government distressed debt at various local levels. One way out is to deepen the economic reform, the other is to integrate much closer with global economy. The former seems to be stuck without the further political reform. And the consumption downgrade and the government debt forced Chinese government to resort to the latter option – export, one of economy growth troika, for economy stability and growth if possible.
Biden administration is facing the challenges of Ukraine conflict, Israel-Hamas war in the Middle East and estimated US economy recession in the first half of 2024 though it might be a soft landing. Decoupling with China may also cost US entities and consumers. Biden needs to balance or improve the relationship with China for US economy and finally for the 2024 election. The huge market in China is still the most attractive point to the investors from the US and its allies.
Comparing to the other emerging markets and developing countries (“EMDC”), China is more stable, resilient and reliable. Among the others, we analyze the reasons for investment in China, sectors and strategy in the coming decade, which the foreign investors may take account of when they make decisions to invest in China at such critical time.
A. Mature and complete regulation on FDI
In the past four decades, China has established a well-developed foreign direct investment (“FDI”) regulation regime, which brought China to what it is today.
The Foreign Investment Law (“FIL”) coming into effect on January 1, 2020 replaced the old three laws regulating FDI in China and push China FDI into a new era.
The foreign invested enterprises (FIEs) can take any forms stipulated under the Company Law of the People’s Republic of China, the Partnership Law of the People’s Republic of China and other laws. It means that foreign investors are free to select the business forms that they want to utilize and are suitable for their business model and sector. Therefore, WFOE is more and more popular, esp. for those foreign SMEs and natural persons investors.
China FDI regime attracted so many foreign investors from the developed economies. The officials in the government from local to national levels are fully aware of the importance of foreign investment in boosting China development. Nowadays, the government at every level are rededicated to bring more foreign investors to revive their economic development.
The entry into force of the Convention of 5 October 1961 Abolishing the Requirement of Legalisation for Foreign Public Documents in China on November 7, 2023 will facilitate the process of FIEs registration. The Ministry of Foreign Affairs (“MFA”) also simplify the visa application form which will save 30% time of the applicant. Ms. Ning Mao, Spokesperson of MFA, announced at Regular Press Conference on November 24, 2023 that China has decided to apply unilateral visa-free policy to more countries on a trial basis, which involves extending visa-free treatment to travelers holding ordinary passports from six countries, namely France, Germany, Italy, the Netherlands, Spain and Malaysia. From December 1, 2023 to November 30, 2024, citizens from the above-mentioned countries holding ordinary passports can be exempted from visa to enter China and stay for no more than 15 days for business, tourism, family visit and transit purposes. This visa-free policy may be expanded to the other countries in order to facilitate cross-border travel and China’s high-quality development and high-standard opening up.
B. National treatment
FIL expressly stipulates that foreign investors and their investment shall enjoy pre-establishment national treatment, which means the treatment accorded to foreign investors and their investments no less favorable to that accorded to domestic investors and their investments at the stage of investment access. The pre-establishment national treatment will be utilized together with the negative list of foreign investment. The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOC) published the latest negative list in December 2021 which includes 31 items(“FDI Negative List”) and applies only to the foreign investors and their investment in China. However, after passing the FDI Negative List test, foreign investment may also be subject to the Market Access Negative List issued by the same authorities, which apply to all natural persons and legal entities in China.
If the foreign investment falls in any sectors outside of the FDI Negative List, the foreign investors can enjoy the national treatment and only need to be bound by the Market Access Negative List.
The foreign investment and operation in the pilot free trade zones (“FTZs”) and Hainan Free Trade Port (“FTP”) are less restrictive than in the other areas of China since a short negative list will be specifically adjusted for such FTZs and FTP. There are 22 FTZs spreading in many provinces and municipalities such as Shanghai, Beijing, Guangzhou, Tianjin, Sichuan, Liaoning and Xinjiang etc.
The Catalogue of Industries for Encouraging Foreign Investment (2022 Version, “the Catalogue”) is the critical document which should draw much attention for each foreign investor when they plan their investment in China. In the Catalogue, you can find the particular industry, field and region encouraged by the government for FDI. The Catalogue is the key cornerstone for the foreign investors to enjoy the preferential policies if any.
The MOC also expressed its intention to reduce the items in the FDI Negative List in order to further open its market to the foreign investors. We can reasonably expect the new version of FDI Negative list in the coming few months during such economic downward period in China.
C. Fair competition
In series of visits by US senior officials，Secretary of State Antony J. Blinken, Secretary of the Treasury Janet L. Yellen and Secretary of Commerce Gina Raimondo, to China in past few months, all of them raised the issue of providing fair treatment and level playing field to the US companies. Janet L. Yellen reemphasize this in her meeting with People’s Republic of China Vice Premier He Lifeng in San Francisco, California on November 9-10, just before the APEC summit there and President Xi’s meeting with President Biden on November 15.
In the European Business in China Position Paper 2023-2024 published on September 20, 2023, the European Union Chamber of Commerce in China expressed the similar concern on “the direct market barriers, such as China’ negative lists, while indirect barriers – which include complex and time-consuming administrative approval requirements and de facto obstacles to obtaining operating license.”
China has been responding to the concerns of the foreign investors in order to boost their confidence. The State Council issued the Opinions of the State Council on Further Optimizing the Foreign Investment Environment and Increasing Efforts to Attract Foreign Investment (“Opinions”) on July 25, 2023, about one month after Blinken’s visit to China. The MOC published the Letter of the General Office of the Ministry of Commerce on Effectively Carrying out the Special Sorting out of Unreasonable Differential Treatment for Domestic and Foreign Investors (“Letter”) on October 20, 2023, about 3 months after Yellen’s visit and one month after Raimondo’s visit to China. It undoubtedly shows the attention of Chinese government on the fair treatment issues raised by the US.
The Opinions expressly stipulate to ensure foreign-funded enterprises’ participation in government procurement activities in accordance with the Government Procurement Law, the revised version of which shall be published shortly in order to reflect such participation. The Opinions also require ensuring that foreign-funded enterprises have equal access to supporting policies like subsidies so that the FIEs and the local competitors can compete on the level playing field. This may cool the critics by the foreign investors on the subsidy by the Chinese government to the local competitors, including the state-owned enterprises (“SOE”) and private enterprises.
Six scenarios which are unfair and unfavorable to FIEs are listed in the Letter and need to be changed and adjusted by the relevant government authorities at national and local levels, as well as the association or chamber. For example, the MOC does not allow the local government to issue policies stipulating that consumers will be subsidized for the purchase and use of new energy vehicles – EV of only Chinese brands. Tesla has been facing such unfair treatment for a period.
With the purpose of stabilizing and attracting more FDI into China, we can reasonably expect that the Chinese government will publish more policies in coming few months to ease the regulation from the establishment, the sale of products and services of FIEs to the exit of foreign investors.
D. RMB appreciation
The rise of FDI in China may come along with the interest rate cut by the Fed and the appreciation of RMB against the dollars.
The Federal Reserve has not completely given up its hiking attitude to raise the interest rate in the coming few months in order to calm down the inflation and achieve its 2% target based on the opening remarks of Fed Chair Jerome Powell at “Monetary Policy Challenges in a Global Economy,” a policy panel at the 24th Jacques Polak Annual Research Conference, hosted by the International Monetary Fund, Washington, D.C. The latest minutes of the Federal Open Market Committee meeting that was held on October 31–November 1, 2023 confirm this stance of the Feb. However, as projected by Morgan Stanley economists, the Federal Reserve may cut the rates if the recession hits in the first half of 2024. And traders indicates it is not probable for the Fed to increase rates again this cycle and in fact are pricing in cuts starting in May.
The USD and RMB exchange rate stands at 7.14 on November 21, 2023 based on the Refinitiv data which is the lowest in past three months. In September 2023, the USD and RMB exchange rate reached the historically high level of 7.34 since 2012. The past decade data seems that a five-year cycle is the chance for the investors and capital market players to play with the depreciation and appreciation of RMB value. The stabilization of RMB exchange rate against USD is the critical goal of the People’s Bank of China and even an appreciation trend will be expected in the future.
The slowdown of FDI in China in the first three quarters 2023 is indicated in the data published by the State Administration of Foreign Exchange (“SAFE”) which can’t be found from the statistics published by MOC, the administration agency of foreign investment in China. To some extent, the FDI slowdown comes from the impact of rising interest rate by the Federal Reserve which attract the capital flow outside China and back to the US.
E. Sectors to invest
Although the Catalogue is the basis for the foreign investors to select the sectors and regions for their investment in China, the Opinions indicated the following sectors will be mostly welcome:
- research and development (“R&D”)
- the clinical trials of cell and gene therapy medicinal products that have been marketed abroad
- vocational education and trainings in advanced manufacturing, modern services, and digital economy
- financing with the pledge of intellectual property rights (“IPRs”), equities and related physical asset portfolios
- IPR securitization
- domestic Internet virtual private network services (the foreign stake shall not exceed 50%), information services (only for application stores, excluding online publishing services), Internet access services (only for providing Internet access services for users) and other value-added telecommunications services
- investment companies and regional headquarters
- domestic investments made by qualified foreign limited partners (“QFLP”)
- relocation of the existing FIEs to the central and western regions, the northeastern regions, and border regions
- major and key foreign-funded projects
- green certificate transactions and cross-provincial and cross-regional green electric power transactions
As response to and implementation of the Opinions, the State Council approved the Measures on Supporting Beijing Municipality to Deepen the Construction of National Comprehensive Pilot Zone for Wider Opening of Services on November 23, 2025.
QFLP will be a huge opportunity. The Chinese government encourage the foreign investors to raise RMB overseas and invest in Chinese domestic market with QFLP channel. The QFLP foreign exchange management facilitation system shall be established and improved to support such investment so that it may solve the exit concern of foreign investors. SAFE published a press on its website on November 15, 2023, which specifically express its intention to promote the cross-border equity investment through QFLP and QDLP (Qualified Domestic Limited Partnership).
QFLP will be an option to invest in non-listed common stocks of the listing companies, convertible debt and preferred stock subject to FDI regulation. This QFLP will also improve the flow of RMB in the offshore and onshore markets from foreign exchange perspective, and finally boost the internationalization of RMB.
The major and key foreign-funded projects are encouraged with purpose to attract large multinational companies to invest significantly in China with one or few major projects. This may improve the confidence of foreign investors, esp. in the current situation of rising exit of the multinational companies from China market. Chinese government will bring all resources to speed up the registration, approval (if any), construction and production of such project if any foreign investor makes investment decision in the existing circumstances where they have a favorable bargaining power and position. The capability of Chinese government for such achievement were testified in the projects of Tesla and BASF, both of which are located in Shanghai.
Foreign investors may also consider the opportunities under the public-private partnership (“PPP”). NDRC and the Ministry of Finance (“MOF”) published the Guidelines on Standardization and Implementation of New PPP Regime on November 3, 2023 and provide the same treatment to the foreign investors as the private investors, subject to the FDI regulations. The failure of PPP implementation in China has tightened the budge of local government and forced the central government to suspend for more than six months. The new PPP regime will be implemented only through concession model and focus on the end-user payment project. BOT, TOT, ROT, BOOT and DBFOT models are recommended for the new PPP regime. But BT is not allowed since it may increase the local government debt burden. The failure implementation of PPP in the last decade leads China’s return to the concession regime which was more popular in 1980s when foreign investors invested in some power plants in China.
Any multinational company should make a commercially not politically right decision on its China market strategy. As President Xi said in his speech on the Welcome Dinner by Friendly Organizations in the United States on November 15, 2023, “China is both a super-large economy and a super-large market. ……Modernization for 1.4 billion Chinese is a huge opportunity that China provides to the world.” It is not a surprise for some multinational companies to relocate their procurement center and manufacturing plants to other countries with cheaper power, water, logistics and human resources cost since the consumption appetite and China economy structure are in transformation. The consumption of Chinese will not always stay at the low-end products and services.
Foreign investment purpose should focus on the sectors listed in above E and keep away from low-end and cheap products. In the process of achieving “better jobs, better lives, and better education for their children”, foreign investors may adjust their investment strategy, sectors and regions. Foreign investors from the developed countries like US, UK, France, Germany, Spain, Italy, Japan and Australia may turn to commercial and financial services, AI, high-end manufacture and public utilities etc. in the coming decade. This will help China upgrade its opening policy from manufacture to service.
However, the foreign investors from the Middle East, Africa, Latin America, Central Asia and SEA may have different strategy for investment in China. The investors from the Middle East may pick up the public utility projects such as roads, water supply and wastewater treatment, as well as the high-tech projects. They will benefit from the improving bilateral relationship between the region and China. The investors from other regions can utilize the advantages of their home country, such as the natural resources and market, to invest the relevant sectors in China with exportation purpose. In terms of trade, the foreign investors can utilize their understanding of their home market and set up a trading company in FTZ or FTP in China for purpose of import goods from China to their home country and export natural resources vice versa. This foreign investment can be extended to manufacturing sector. Once the industrial chain matures in the home country and/or the manufacture cost in China can’t bring reasonable profit, it will be time to relocate the plant to investor’s home country. That process of industrial transfer will be all-win for China, foreign investors and their home country.
FDI always goes with China outbound direct investment (“ODI”). Belt and Road Initiative (“BRI”) should be understood and implemented not only from the perspective of ODI, but also FDI. When Chinese investors discuss the ODI projects in host country with the partners, foreign investors should bear in mind of how to work with Chinese partners for a related FDI project in China. And vice versa, when foreign investors discuss the FDI projects in China with Chinese partners, Chinese partners should consider the possibility to work with the foreign investors in their home country or third market. That is the globalization mindset both Chinese and foreign investors may have.
When China intends to widen opening and BRI enters 2.0 era, FDI into China is not only a chance to the investors from the developed countries, but also to those from EMDC.
 the Law of the People’s Republic of China on Chinese-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, and the Law of the People’s Republic of China on Chinese-foreign Cooperative Joint Ventures which regulate EJV, WFOE and CJV respectively.
 Article 14 of FIL.
 Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), https://english.beijing.gov.cn/investinginbeijing/WhyBeijing/lawpolicy/laws/202201/t20220113_2590429.html
 https://www.federalreserve.gov/newsevents/speech/powell20231109a.htm, https://edition.cnn.com/2023/11/09/economy/jerome-powell-rate-hikes-imf/index.html