China Economy

China's moves to boost foreign business also help Chinese companies

Key Points
  • China is making historic strides to increase foreign access to its local markets, moves which some analysts say are changes Chinese companies need in their own development to becoming global players.
  • "To me what is key about the opening is where it comes from: China is looking to globalize its market, not necessarily liberalize it,‘’ said Chantal Grinderslev, partner at Shanghai-based investment management consulting firm Z-Ben.
  • Lester Ross, chair of the policy committee of the American Chamber of Commerce in China, said he expects foreign companies could likely gain 10% to 20% of the Chinese market, but it's a question whether the businesses could capture much more than that.
Employees walk in Luziajui business district of Shanghai, China.
Lucas Schifres | Getty Images

BEIJING — The Chinese government's latest efforts to make it easier for foreign businesses to operate locally come as China's own companies seek to be global players.

China pushed ahead this month with long-awaited announcements for removing foreign ownership limits in major parts of the financial industry. Some foreign business organizations also said this month that they are encouraged by the draft rules for implementing China's new foreign investment law, which takes effect Jan. 1.

While the moves come amid pressure from the U.S. on trade, some analysts point out how such changes help China achieve its own development goals, which may not jibe with the vision many foreign organizations have for a more market-oriented system.

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"To me what is key about the opening is where it comes from: China is looking to globalize its market, not necessarily liberalize it,‘’ said Chantal Grinderslev, partner at Shanghai-based investment management consulting firm Z-Ben. She added that difference will affect how companies — in her case, financial firms — choose to expand into China.

There are also limits to how much of the Chinese market foreign businesses can tap, now that the Asian country has grown into the world's second largest economy. In terms of trade, technology and capital, the world has increased its exposure to China between 2000 and 2017, while the Asian giant has reduced its exposure to the rest of the world since 2007, McKinsey Global Institute said in a report this summer.

Lester Ross, chair of the policy committee of the American Chamber of Commerce in China, said he expects foreign companies could likely gain 10% to 20% of the Chinese market, but it's a question whether the businesses could capture much more than that.

Foreign banks still have less than 2% of the market, despite having been able to operate in China for more than a decade, analysts pointed out.

In the meantime, the entrance of foreign financial institutions could help Chinese individuals and companies get better access to global markets, said Ross, who is also partner at law firm WilmerHale. For example, he noted, "There are weaknesses in the Chinese regulatory system that hurt the ambitions of the Chinese financial institutions in the U.S."

Chinese also want better IP protection

Another area in which China is responding to foreign business complaints is intellectual property protection.

"One of the reasons this is changing is because you have Chinese companies starting to acquire international brands that are valuable as well," said Andrew McGinty, a Hong Kong-based partner at law firm Hogan Lovells.

China could still do more to show how serious it is about intellectual property protection, McGinty said. But he noted efforts such as a clause in the draft rules for implementing the new foreign investment law that requires the removal of trade secrets when officials exchange documents internally.

The foreign investment law was passed in March and aims to improve intellectual property protection, prevent forced technology transfer and put overseas companies on equal footing with local players.

"This is probably the single biggest burst of opening since foreign investment was allowed in China (in roughly the 1980s)," McGinty said.

After the Communist Party of China took control of the country in 1949, the economy was essentially closed to foreigners until 1978, when former Chinese leader Deng Xiaoping spearheaded a restructuring known locally as "reform and opening up." China's international business also increased after the country joined the World Trade Organization in 2001, despite criticism that Beijing has been slow to follow through on commitments to reduce government control. Critics add that after Xi Jinping assumed power in 2012, initial efforts at increasing market-oriented policies have been reversed.

This is probably the single biggest burst of opening since foreign investment was allowed in China (in roughly the 1980s).
Andrew McGinty
Hong Kong-based partner at law firm Hogan Lovells

U.S. President Donald Trump has stepped up pressure on China to buy more American products and address long-standing business complaints about unequal market access. Since last summer the Trump administration has applied tariffs on billions of dollars' worth of Chinese goods and placed several prominent Chinese technology companies on a blacklist that essentially prevents them from buying from their American suppliers. China has retaliated with tariffs of its own on U.S. goods and threatened the release of an "unreliable entities list."

Just hours before Trump and Liu He, China's top trade negotiator, held their press conference at the conclusion of high-level trade talks earlier this month, the China Securities Regulatory Commission announced foreign entities could take full ownership of futures companies beginning Jan. 1. Foreign companies can also take control of mutual fund management companies beginning April 1 and securities companies from Dec. 1, 2020, the regulator said.

Among other measures, China last week also announced new regulations for improving the business environment.

"China today is much better than it was 30 to 40 years ago," said Xiaodong Lee, founder and CEO of Fuxi Institution, a consultancy on internet development in China that promotes cross-border connections.

Lee encouraged foreigners to come see China for themselves and to take advantage of an environment that is still developing, despite its differences from the U.S.

"In China (foreign businesses) can make money, and China also hopes the foreign companies can make more money," Lee said, according to a CNBC translation of his Mandarin-language remarks.

American companies and their affiliates make far more money in China than that of their Chinese counterparts in the U.S., research firm Gavekal Dragonomics said in a report in August. The firm's analysis showed that in 2016, American business sales in China topped $450 billion, while the Chinese sales in the U.S. were less than $50 billion.