Technical Tuesdays

Is China Becoming Friendlier to Foreign Investors?

Many foreign investors dream about setting up shop and expanding their activities in China’s booming economy.

But that’s easier said than done. In China, some industries are riddled with obstacles and restrictions for foreign investors.

The best-known restrictions are the so-called “Sino-Foreign joint venture only” rule and the “majority Chinese ownership or Chinese party controlling” rule.

The former prevents a foreign investor from carrying out their business without a Chinese partner to create a joint venture. The latter prohibits foreign investors from holding more than 50 percent of a company’s shares.

But in an unprecedented twist, Chinese companies are on the verge of investing more in the rest of the world than the world invests in China. This is illustrated in the graph below.

This can be partly explained by the slowdown of foreign direct investments (FDIs) into China. But it is mostly due to the steady rise in Chinese outbound investments.

You see, it’s no secret that China has already accumulated vast amounts of wealth. So now, Chinese companies naturally want to spend some of that hard-earned cash to get a foothold in the global markets.

Chinese investors used to focus on the international natural resources sector. But the graph below shows how their outbound investments are now more geared towards the global financial and manufacturing sectors.

When it comes to inbound investments, China has been rather welcoming of FDIs since its economic reforms in 1978. But they still strategically channel FDIs into specific sectors, targeting growth. For example, they allowed FDIs into most, but not all, of the manufacturing sector.

It’s hardly shocking that China is more closed to FDIs than advanced economies, like the U.S. But what is remarkable is how China is more closed-off than other developing countries, notably the emerging and prominent BRICS economies.

As you can see above, China’s has the most restrictions to FDI across the BRICS board.

It’s also striking that some important destinations of Chinese overseas investments are funding sectors that are relatively shut-off from inbound FDIs to China. These sectors include mining, construction and finance.

By protecting these sectors, Chinese companies can develop themselves without being hindered by foreign competition. Then, when they have accumulated enough wealth, they can start to branch out overseas.

China’s four state-owned banks are a clear example of this. They started out in a domestic market where FDIs had been limited to just 1 percent. But now, these four banks are among the largest in the world and they’re expanding globally.

But the tides are turning as China looks to create a more competitive environment for foreign companies.

In 2015, China greatly reduced the number of industries that were restricted by foreign ownership. Now industries ranging from real estate to diamonds to high-aluminum fireclay have the “green light” for foreign investors.

Some industries like high technology and environment friendly are even encouraged by the Chinese government to receive FDI.

So, if you do business in one of those freshly liberated industries, the time might be right for you to expand your operations into China…

Dear valued readers,

We would like to apologize for a mislabeled graph in last week’s Technical Tuesday. The graph title was “Chinese ODI by Selected Sectors”. It incorrectly suggested the graph was measuring the total amount of ODI.
When in fact the graph was explaining the growth rates of ODI by selected sectors. The graph’s title has since been fixed.
We sincerely apologize for this mistake.

Sincerely,
One Road Team