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Professor Ang says China is considering reforms to free up investment, but warns that fewer entry barriers can only mean more intense competition

Professor Ang says China is considering reforms to free up investment, but warns that fewer entry barriers can only mean more intense competition
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By Siah Hwee Ang*

Many aspects of structural reforms in China over the last year or so have hit foreign multinational corporations hard.

For one, the crack down on anti-competitive behaviours has swept across industries that are dominated by foreign multinational corporations - though the Chinese authorities have explained that industries dominated by domestic players were not spared the whip either.

The “new normal” has ensured that the fight for survival for some and continued better performance for others have never been this intense before.

Such is the uncertainty surrounding the Chinese market that many foreign firms are contemplating not investing in it further. Some are even thinking of diversifying market risks by reducing their engagement altogether.

It’s not looking good.

Still growing nonetheless, just slower

Despite the new uncertainties in the Chinese market, China, in fact, became the top destination for foreign direct investment (FDI) in 2014.

According to the United Nations Conference of Trade and Development, last year foreign multinational corporations invested US$128 billion in China, followed by US$111 billion in Hong Kong and US$86 billion in the United States.

Globally, foreign investment fell by 8% to a total of US$1.26 trillion last year.

It should be noted, however, that investment in the United States was hampered by a major divestment—where US firm Verizon bought back US$130 billion worth of shares in a joint venture from Vodafone in the UK.

“Your investment is still welcome”

Last month, at the 45th World Economic Forum Annual Meeting in Davos-Klosters, Switzerland, Chinese Premier Li Keqiang announced some reforms that China is undertaking to facilitate investments into China.

These reforms include mainly the relaxation of restrictions in less strategic industries. Relaxations can include less need for partnerships and to transfer technology, and the extent of inflow and outflow of funds in China.

The reform proposal is currently under consultation.

Once approved, it would mean more leeway for foreign multinational corporations to capitalise on—similar to the effects of deregulation for markets that have been restrictive.

Some are predicting that the reforms will increase the FDI flows into China by 50% within 5 years.

More Openness More Competition

Along with the relaxation of restrictions on FDI, the other message in the new proposal for investment reforms relates to the movement toward all firms being treated equally, be it domestic or foreign.

Many of the foreign multinational corporations have strong products and brands that deem them good enough to survive and do well in China. However, international business literature does remind us that domestic firms often have a head start to the competitive landscape.

So for foreign multinational corporations and domestic firms to be treated equally doesn’t and shouldn’t mean much.

The build-up to the market economy for China can clearly benefit from competition at equal footing.

But with market openness comes stiffer competition.

To put it simply, improving the ease to invest does not constitute success. In fact, less entry barriers can only mean more competitors and competition that is more intense.

The red carpet is being replaced by a new one with a larger “Welcome” print. Nevertheless, whether you’re on it or are about to step on it, it just won’t get any easier.


Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with China. You can contact him here.

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