Adapting to changes

Although foreign companies are enjoying more convenience while doing business in China, the gradual abortion of the special national treatment and the rising labor and land costs in the country are causing some concerns among the foreign community.

In order to attract foreign investment at the beginning of the reform and opening-up drive in the late 1970s, the Chinese Government has offered foreign firms special national treatment, exemplified by a lower tax rate or tax exemption and cheap land rent fees.

"These preferential treatments have been growing increasingly incompatible with the demand for fair competition of the market economy and imminent change," said Kuang Xianming, Director of the Center for Economic Transition under the Hainan-based China Institute for Reform and Development.

"As the special treatment is being phased out, foreign companies will be subject to more uniform supervision, fairer treatment and more transparent rules," Kuang added.

"China is becoming less and less attractive to foreign companies as a workshop or manufacturing base, because countries like India, Viet Nam, and Indonesia are able to offer labor more cheaply," said Parkinson.

However, he thinks that this should not be a question of concern because the key to China's sustained economic growth is to spur domestic consumption.

"Once foreign investment is introduced to the service sector, there will be more competition between domestic and foreign companies in the industry, which will inevitably lower prices and encourage spending," said Parkinson

He also pointed out that Shanghai FTZ's practice of opening up more service sectors to foreign investment will attract Western countries like the United Kingdom, which are service-based, to further export their services to China.

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Application of the Negative-List Approach

A "negative list" is usually appended to a bilateral investment treaty. It specifies areas where foreign capital is banned or limited. Areas not listed are assumed to have no restrictions and only need to register with relevant authorities. In contrast, in the past, the establishment of foreign-invested enterprises was subject to the development approvals, reform commissions and commerce authorities at both national and local levels.

The approach was first adopted in the China (Shanghai) Pilot Free Trade Zone (FTZ), an important test field in China for freer trade and a more liberal business and financial environment, launched in September 2013. It marks an attempt to transform the investment administration system in China from approval-based to a registration-based.

An updated version of the negative list released by authorities of the Shanghai FTZ on July 1 reduces the restrictions and conditions for overseas investment from 190 to 139.

China will start substantive negotiations on the negative list with the United States in early 2015 as part of ongoing bilateral investment treaty talks between the world's two largest economies.

The State Council decided last December to launch three new FTZs in north China's Tianjin, southeast China's Fujian Province and south China's Guangdong Province, where many special measures piloted in the Shanghai FTZ will be replicated including the negative-list approach.

The Guangdong FTZ will mainly serve companies in the high-end financial service industries located in Hong Kong, the Pearl River Delta region and Macao. The Tianjin FTZ targets those located in north China, where some 80 Fortune 500 companies have established their presence, including many international multinational firms. Meanwhile, the Fujian FTZ will focus on trade with Taiwan.

The negative-list approach was adopted by a draft Foreign Investment Law released by the Ministry of Commerce on January 19.

(Compiled by Beijing Review)