GO
Loading...

Foreign Companies Chafe at China’s Restrictions

Foreign companies doing business in China are increasingly feeling as if the deck is stacked against them.

China has filed more than a dozen trade cases to limit imports, imposed a series of “buy Chinese” measures and limited exports of some minerals to force multinationals to move factories to China.

Foreign executives in China find themselves increasingly at odds with Chinese officials over these measures, which Westerners view as protectionist and intended to give an edge to Chinese companies. Surveys by Western chambers of commerce of executives show growing disenchantment over the past year and a sense that doing business in China, never easy, is growing harder.

Arriving in Hong Kong on Sunday evening at the start of a nine-day trade mission to China, including stops in Shanghai and Beijing, the American commerce secretary, Gary Locke, said that his agenda for discussions with Chinese officials included Western companies’ difficulties in the Chinese market.

Karin Slade | The Image Bank | Getty Images

“There are some policies of the Chinese government that many countries have raised concerns about, including the United States,” Mr. Locke said at a press conference at Hong Kong International Airport.

In January, when the Chinese government overhauled procurement rules to encourage more competition, including from foreign companies, Beijing officials exempted all public works projects, which account for half of government procurement. Contracts involving state secrets or business secrets are reserved for Chinese companies, and Chinese bureaucrats have been given broad latitude to exclude companies with foreign owners even if the company has been set up in China and has all of its operations in the country.

The trend toward favoring Chinese-owned companies, Chinese and Western executives and economists say, has been driven by a powerful combination of economic nationalism and an evolving blend of capitalism and socialism. Partly state-owned corporations, armed with lobbyists, have gained considerable influence over the state. Many Chinese executives are former party cadre members whose primary concern now is making a profit, not balancing long-term international policy considerations.

This has many multinational executives deeply worried. They say severe recessions and the near collapse of banking systems in many Western countries a year ago, coupled with China’s relatively robust economic performance, have persuaded Chinese policy makers that Western policies of free trade and open markets do not work as well as previously thought, and that new industrial policies are worth trying.

“They say, ‘Don’t show us broken models; we’re looking for a completely different way,’ and you see a much greater willingness to experiment with completely untested policies,” said a senior executive at a multinational who insisted on anonymity for fear of retaliation by Chinese regulators.

With China already struggling to limit an influx of cash that threatens to push up the value of China’s currency against the dollar, the Chinese government has much less incentive these days to welcome foreign investment.

As foreign companies step up their complaints, the Chinese government has already begun responding on a few issues.

In mid-April, the government announced a more open policy toward foreign investment in a few high-tech industries and in some less prosperous regions. It also paused a plan to give preference in government procurement to products using intellectual property first registered in China. Mr. Locke said that the plan remained a concern.

Chinese leaders are also becoming worried that China’s restrictions on other countries’ exports and overseas investments might set an international precedent for limiting China’s own overseas expansion, at a time when China has emerged as the world’s largest exporter and when Chinese companies are making more international acquisitions. Chinese leaders have gone out of their way in recent days to reassure multinationals.

“We will endeavor to create a level playing field for all market players, foreign and Chinese enterprises alike,” Premier Wen Jiabao said.

Despite these signs of a softening stance, many barriers remain.

The Chinese government has become quick to accuse other nations of dumping, or selling goods for less than it cost to produce them. China started 19 anti-dumping cases last year.

China has been a strong critic of anti-dumping cases elsewhere that limit Chinese exports. Yet China tied the United States last year as the third-biggest initiator of anti-dumping cases, according to statistics gathered by international agencies. China and the United States trailed India and Argentina, but each started more anti-dumping cases than the European Union.

When China joined the World Trade Organization in 2001, it promised to sign as soon as possible the W.T.O.’s agreement banning discrimination against foreign companies in government procurement. Most industrialized countries have signed the agreement. But China has never actually accepted it, leaving the nation free to adopt “buy Chinese” policies that allow government agencies to favor Chinese-owned companies when they award contracts.

Aggresive moves

In sectors like green technology, Chinese companies’ advantages are clear. State-controlled banks are providing generous loans at near-zero interest rates to Chinese-owned companies that manufacture clean energy equipment like solar panels. And foreign-owned companies that set up wind farms in China have been banned from selling carbon-emissions credits to businesses in Europe, denying these companies millions in revenue even as Chinese-owned companies with wind farms are allowed to sell the credits.

Analysts point to a surge of economic nationalism across China, and not just inside government ministries, after China’s heady success in the face of the global downturn.

China’s commerce ministry, for instance, had a cool but not especially confrontational initial response last autumn to President Obama’s imposition of tariffs on tires. But after a weekend of furious exchanges on Chinese Internet chat rooms and suggestions that the Chinese government was not standing up to the United States, the commerce ministry issued a blistering statement describing its plans to investigate automotive and chicken imports.

Changes in the way the Communist Party operates have also fueled the pro-China measures. Starting with the military in the late 1990s, and gradually expanding to other industries since then, the party has gradually forced its members to choose: they can be military officers or ministry officials, or they can run companies, but they are discouraged from holding government and corporate jobs at the same time.

This shift has meant that corporate executives, often former government officials or military officers who have turned into capitalists, have more of a stake in maximizing their company’s profits.

Corporate influence is increasingly apparent. Office buildings near important ministries in Beijing are stuffed with lobbyists. They are usually on the staff of big corporations, as opposed to independent lobbying firms of the sort that populate K Street in Washington.

Corporate executives in China now speak openly of giving instructions to their lobbyists in Beijing when they do not like a policy. When the commerce ministry started its investigation last autumn of American automotive and chicken exports, the ministry said that it was acting at the request of the industries’ rivals in China.

China has been particularly aggressive in using its position as the world’s dominant exporter of some raw materials to force multinationals to move production to China.

Sergio Iorio, the chief executive of an Italian chemical company, remembers vividly when a weeping Chinese mine owner called him in Genoa two years ago. The Chinese government had imposed a prohibitive export tax that, in a single night, quadrupled the price of yellow phosphorus, a crucial raw material for more than 2,000 phosphorus-based chemicals.

“I was seated, or I would have fallen down,” Mr. Iorio recalled.

But Beijing officials provided a loophole: if Mr. Iorio’s company, Italmatch Chemicals, manufactured its chemicals in China, they could be exported without the tax.

China has gradually lowered the export tax on yellow phosphorus since then. But Italmatch and other chemical companies are still responding by rushing to expand production in China.

“We don’t know if and when this can happen again,” Mr. Iorio said.

Contact Asia News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Asia Video