Division Report: FDI Regulation
The regulation of foreign direct investment (FDI) in and out of China is a vital qualitative factor to analyze when considering the role that FDI will play in the future growth of the Chinese economy. FDI in China is regulated by rules, legislations, and norms enacted by the Chinese Communist Party that pertain to the outflow and inflow of foreign direct investment in the country. Simultaneously, it is necessary to understand what laws other countries, like the United States, have in place to control Chinese investment in their countries and discern whether the presence of Chinese investment in the world is welcomed or discouraged. The regulation of FDI in the United States is extremely important to take notice of due to the rising economic tensions between China and the U.S. Additionally, China has poured billions of dollars of FDI into the U.S., making it an integral source for Chinese foreign direct investment outflow. As a rival great power and economic leader in the international system, the United States could set an important precedent if they continued to restrict Chinese FDI; other countries could follow suit, dampening China’s FDI outflow growth. Most importantly, the impact that the regulatory laws on FDI have on Chinese and foreign companies is essential to further understand to gauge the current and future growth of FDI and the Chinese economy. Other factors researched include: priorities influencing regulation, diversification, interaction with special-economic-zones, and the impact of COVID-19 and politics on Chinese international relations. Previous research conducted, such as the dynamics between Chinese SOEs vs. private firms, fintech (domestic and international growth and expansion), and most importantly, financial regulation, provided robust context to begin specific research on FDI regulation in China.
Since 1979, China has adopted the strategy of “reform and opening up” its economy. The Chinese government has established legislation over the past few decades to encourage the presence, cooperation, and growth of investment by foreign firms and enterprises in China. Foreign investment into China was not looking promising around early 2017, as many foreign firms shut down factories and operations in China to move elsewhere; many companies stated that they were deterred by the high restrictions and lack of transparency in doing business in China. To stop this pull-back from compounding, the Chinese government enacted a series of regulatory reforms targeted to improve and relax the business environment for foreign investors. Notably, the revised Foreign Investment Industrial Guidance Catalogue and the National Negative List (a list created by the State Council that permits all investments except those in the list) were implemented in June of 2016. In Spring 2019, China passed a new Foreign Investment Law (FIL), a move that was considered to be the most significant change in the Chinese foreign investment industry since the 1990s. The law went into effect on January 1, 2020, and replaced the three existing laws on foreign investment in China (the Law on Sino-foreign cooperative joint ventures, the Law on wholly foreign-owned enterprises, and the Law on Sino-foreign equity joint-ventures). The FIL sets lower market thresholds for foreign investors and enforces greater oversight over commercial activities in China. All foreign-invested enterprises (FIEs) have 5 years (starting January 1, 2020) to change their structure to comply with the new FIL to continue operations in China. The changes that stem from this new legislation include: granting foreign investors equal treatment, lower market threshold and stronger oversight, protective measures for foreign investors in China, and stronger intellectual property protection. The FIL was established in China at a time of slow economic growth, hostile trade tensions with the U.S., and the need for updated FDI legislation; the law also signals China’s commitment to creating a more flexible, transparent, and fair business environment for foreign investment. Overall, the FIL is consistent with the current legislative reform trends in China and is a great stride towards fulfilling the CCP’s desire to create a healthier domestic economy. The legislative shift towards industry fairness and encouraging foreign firms to invest in China signals a positive outlook for the growth of FDI in China.
On the other hand, outward FDI from China has been hampered by several obstacles in the international sphere, and more than ever in recent years. The United States and China have suffered soured trade tensions since the start of their on-going, retaliatory trade war in 2018. The COVID-19 pandemic only heightened tensions between the two countries in terms of nationalism, distrust, fractured economies, and American concerns of over-dependence on foreign manufacturers and suppliers. In recent years, the U.S. has strengthened restrictions and legislation on FDI, especially from China. The Committee on Foreign Investment in the United States (CFIUS) has increased its capacity for the scrutiny of foreign investments, review of covered transactions, and determination of whether foreign investments pose a threat to US national security. Furthermore, China has continued to impose strict regulations on outbound capital flows (OFDI) in certain sectors. Chinese firms can be restricted from access to international markets through methods like equity caps under the jurisdiction of the CCP. Given the increased schisms and hostility in U.S.-China relations coupled with Beijing’s regulations on outward FDI, the future of outflow of Chinese foreign direct investment is hazy and may not see improvements in the near future.
When considering the question, “what role will FDI play in the growth of the Chinese economy?” in the context of foreign direct investment regulation, there are two forecasts that can be made: inward FDI into China has good prospects and can lead to a long-needed growth in the Chinese economy; however, outward of FDI from China into foreign countries does not look too promising due to hostilities in the international climate, increasing regulations, and domestic restrictions on certain OFDI. Some limitations on creating a forecast based on FDI regulation are the volatility of international politics and the economy, specifically the relations between the United States and China. To evaluate the outlook of outbound FDI from China, it is imperative to know if the U.S. will continue its current approach of increasing regulation on FDI to discourage Chinese investment in the U.S., which in turn could set a precedent for other major economies and their regulatory agencies.
