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China needs to push forward institutional reform to attract foreign investment

With growing external and internal challenges, China should further liberalize restrictions over foreign investment to enhance foreign investors’ confidence in the Chinese market

By NewsChina Updated Nov.1

On August 13, the State Council, China’s cabinet, issued a 24-point policy framework aimed at enhancing the business environment and encouraging foreign direct investment (FDI) into China. Addressing issues such as fair competition, tax incentives, cross-border data transfer, and research and development support, the measures emphasize the need to create a market-oriented, rule-of-law-based business environment, amid growing concerns among international businesses following tightened restrictions over investment to China imposed by the US.  

According to the World Investment Report 2022 released by the United Nations Conference on Trade and Development (UNCTAD), 36 countries, mostly developed economies, are conducting foreign direct investment screening for national security in 2021. Together they account for 63 percent of global FDI inflows in 2020.  

The external challenges only accentuate the significance of further opening up for China. In the past, China’s opening-up policy has focused on promoting the free flow of commodity and production factors. Since the establishment of the free trade zone in Shanghai in 2013, China shifted its focus to promote what it calls “institutional opening-up,” making and shortening its negative list of sectors that restrict or prohibit foreign investment. Since 2017, China revised its foreign investment negative list for four consecutive years, reducing restriction measures by nearly two-thirds, and introduced major opening measures in key sectors such as finance and automobiles. The manufacturing sector is now largely open to foreign investment.  

Despite this progress, the negative list in 2021 still contained 31 items, with 8 categories and 22 items of special administrative measures for the service industry, covering areas such as logistics, education, culture, healthcare, commerce, telecommunications, digital technology and digital content services. Moreover, compared to international legal provisions, China’s foreign investment-related laws, including the negative list system, still lag behind in terms of transparency, stability, clarity and ease of implementation.  

With growing external and internal challenges, China should further liberalize restrictions over foreign investment to enhance foreign investors’ confidence in the Chinese market. First, it should focus on quickly implementing the recently unveiled 24 measures on attracting foreign investment.  

Second, it needs to accelerate the upgrade of the business environment. Currently, various global organizations such as the World Bank, UNCTAD, the International Telecommunication Union, the World Intellectual Property Organization and the World Economic Forum include the digital business environment in their evaluation indicator systems of business environment, making it an important reference indicator for attracting foreign investment. Therefore, China should align its digital business environment reforms with the World Bank’s new Business-Ready (B-Ready) regulatory system, which covers connectivity, data privacy and security, logistics, payments and digital market regulations.  

China also needs to promote fair competition between domestic and foreign-funded enterprises. Besides strictly enforcing its negative-list management system, it should address the restrictions on foreign investment in terms of business model, licenses and operating conditions. The government should focus particularly on the service and high-tech sectors such as semiconductors and artificial intelligence, while cautiously advancing the opening of value-added telecommunications, internet data centers (IDCs) and cloud computing businesses.