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China still not doing enough to woo foreign investment, with local governments accused of harming progress

Amanda Lee in Xiamen, China

China's biggest investment fair was intended to project the image that the country is fully open for business, but instead it has been dominated by foreign firms complaining that local governments are still making it a difficult place to operate.

Delegates in Xiamen this week suggested that local governments are ignoring advice from Beijing as it aims to increase market access and improve level the playing field with domestic companies, meaning that the implementation of reforms to make it easier for foreign firms to operate in China still have not gone far enough.

As it undergoes pressures caused in the most part by the trade war with the United States, Beijing is redoubling its efforts to woo investment by lavishing promises of fair treatment on foreign investors and giving VIP treatment to the likes of Telsa CEO Elon Musk.

But capital controls that restrict the flow of money into and out of the country, as well as lack of transparency in the bidding processes involving local governments, were among specific concerns raised during a panel discussion at the annual China International Fair for Investment and Trade.

"In the past, when it comes to tenders and bidding, everyone would immediately turn to the company identity. This happened very often. This is a foreign company, that is a state company and this is a private company.

Sometimes it's not explicit, but it would be like, this is an important project, maybe it isn't appropriate for a foreign company," said Wang Jie, vice-president of Schneider Electric China, which manufactures and distributes electrical components.

According to Wang, the National Development and Reform Commission (NDRC) has sought to improve regulations concerning tenders and bids for government projects, but there remains room for improvement.

"In practice, with local governments, when it comes to execution, it was just like before," Wang added. "But I believe the overall direction is not to categorise companies."

In addition, the government needs to offer "some certainty in terms of policy development", Wang said, given the current uncertainty on the outlook for trade tariffs as Beijing engages in the trade war with the US.

Zhou Bing, vice-president for Dell Greater China, said that it is important to have more flexibility in cross-border capital flows to boost trade, with China currently maintaining strict controls that can effectively shut off outflows. This can prove to be a major disadvantage for overseas investors who want to know that they can transfer their money out of China after it has been invested.

"We are a typical company in the processing trade business here," said Zhou, referring to a company that imports components into China to assemble them into finished goods before being exported.

"So, it means there's massive amount of capital flowing in and out [of China]. Right now, it's still relatively smooth, but in the long term, do we want to keep our capital in China, do we keep our profit in China? It depends on how open the policy is."

Xu Weijun, chief strategy officer at US-based Kiwa Bio-Tech, which develops, produces and markets agricultural products, said problems still remain at local government level because many officials do not understand how to successfully nurture an industry, let alone a foreign one.

"Some governments are still making assessments based on production volume or how much tax revenue they will receive [from foreign companies]," said Xu. "They are still stuck with these benchmarks because they don't know what the companies want. Even if these firms have signed on, they would probably not hang in there for long."

China updated its foreign investment law earlier this year making it illegal for domestic companies or governments to demand forced technology transfers as a condition of doing business with the hope of improving the environment for overseas firms. The government has also created more free trade zones offering wider market access, while also cutting red-tape for investors.

Cao Hongying, the executive vice-chairman of the government's foreign business association, said China has been making efforts to further open its market, including shortening the negative list of areas where foreign investment is restricted or prohibited.

"In the free trade zones, the negative list has been reduced down to 37 items, but the negative list is still too long," Cao said.

In addition, local governments may have "different" interpretations of the negative lists that have led to inconsistent application, Cao added.

Sun Zhenyu, who served as China's ambassador to the World Trade Organisation from 2002 to 2010, said there are problems with operating conditions for foreign companies in many areas and it is reasonable for foreign firms to demand fair treatment.

"If it wasn't for the foreign companies, [China's economy] wouldn't be where we are now," said Sun. "Right now, there are some problems, there are many areas that need to be improved."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.