Chinese steel mills and automakers are already grappling with soaring costs and waning demand, but there is worse yet to come — lower entry barriers will give their foreign rivals easier access to Asia’s biggest economy.
China is easing entry restrictions at a time when most — if not all — of its manufacturing industries are facing severe overcapacity.
By opening them to foreign competition, the government is allowing weak and inefficient domestic players to wither and die, analysts say.
The Ministry of Commerce outlined the extent of the competition and the breadth of affected industries in no uncertain terms in a Nov. 19 media briefing.
Among other manufacturing industries, steel, chemical and car manufacturing were singled out for special mention. All are heaving with excess capacity, some weighed down by inefficient production.
They will be up against foreign companies that will enjoy looser regulations on registered capital, shareholding and business scope. In addition, they are being encouraged to establish regional headquarters and research and development (R&D) facilities in the mainland.
Previously, foreign steel mills were required to have an annual output of at least 10 million metric tons. They were not permitted to take controlling stakes in a Chinese steel company.
ArcelorMittal, the world’s No. 1 steel producer, tried to take over Valin Iron & Steel Co. Ltd. (000932.CN) as early as 2005 but the deal was blocked by the National Development and Reform Commission (NDRC) on regulatory concerns. It was forced to scale back the deal, becoming Valin’s second-largest shareholder with a 29.97 percent stake.
ArcelorMittal also failed to buy into Laiwu Steel Group Co. Ltd. and acquire Hangzhou-based private steel mill Orient Holdings Co. Ltd. on similar grounds.
China is a beacon for growth-conscious foreign carmakers seeking diversification from saturated markets in the US and Europe into the world’s biggest automobile market.
General Motors Co., Volkswagen A.G., Toyota Motor Corp. and Honda Motor Co. have been operating in China through joint ventures with domestic partners.
However, in most cases, they are not allowed to take control of the joint ventures. Also, local government officials are becoming less friendly to foreign carmakers as homegrown champions such as Geely and BYD have expanded rapidly.
Certain categories of auto manufacturing were removed from a list of sectors officially sanctioned for foreign investment, a Dec. 2011 NDRC statement said.
The lurch toward a friendlier regime for foreign players is in line with reforms announced by the Communist Party at its recent plenum. A key plank of the reform agenda is a “fundamental” role for market forces in the reallocation of resources and less government intervention.
China attracted US$97 billion in foreign direct investment during January to October, up 5.77 percent from a year earlier.
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