For foreign firms, the challenge is the mainland, not Hong Kong

April 25, 2016 09:36
AmCham China chairman James Zimmerman bewails the lack of market access and barriers to investment in the country. Photo: Reuters

The foreign business community is watching with anxiety recent developments in Hong Kong such as the attacks on the legal system, the erosion of media freedom and the potential of street violence similar to the Mong Kok clashes in February.

But the investment climate in the city remains far superior to that in the mainland, which is where the vast majority of foreign investment is directed.

It is concerned about the deterioration of that climate which dominates meetings of foreign executives and reports to their capital cities.

“Serious and systemic challenges remain, particularly around the key issues of market access and barriers to investment, opaque rules and regulatory practices, and the overall development and respect for the rule of law,” said James Zimmerman, chairman of the American Chamber of Commerce in China, at the release of its 18th White Paper on American Business in China on April 15.

“The continued lack of clarity surrounding its stated reforms, the continued use of industrial policies that restrict foreign participation in China’s economy, the lack of transparency and excessive discretion in the enforcement of regulations and the implementation of overly broad national security regulations are creating fundamental concerns about a divergence between the direction of China’s development and international norms,” the paper says.

A poll of nearly 500 AmCham member companies found that the number one business challenge was inconsistent regulatory implementation and unclear laws.

Other major challenges are the difficulty of obtaining required licences and increased protectionism.

“More than three-quarters of respondents feel that foreign businesses are less welcome in China … Technology and R&D-intensive sectors report a greater number of regulatory and policy-related challenges … they also reported the greatest pessimism toward the future regulatory environment.”

One in four respondents has either moved capacity outside China in the past three years or is planning to move capacity.

Nonetheless, China remains one of the top three investment priorities for 60 percent of member companies and the number one priority for about 25 percent of members. 

European investors have similar concerns.

In its most recent position paper, the European Chamber of Commerce said: “The leadership’s overwrought concern with national security issues, expansive wording in a slate of recent legislations that often obfuscates the law, as well as the slow progress in the overall implementation of market reforms, is unsettling for business and causing a loss of confidence. 

"European business is therefore asking to what extent China really considers it as part of the reform effort."

“Never before has the European Chamber seen such a contradictory government agenda of reform and closing up,” said its president Jorg Wuttke. “I am very concerned that reform momentum has been lost.”

In a report on Overcapacity in China, published in February, the chamber said that each Central Work Conference since 2007 had named this a priority.

But central government efforts had been ineffectual “due to regional protectionism, weak regulatory enforcement, low resource pricing, misdirected investment, inadequate protection of intellectual property rights and an emphasis on market share”.

One European businessman in Beijing said that, since Xi Jinping took over as party secretary in 2012, he had focused his energy on the anti-corruption campaign, reform of the People’s Liberation Army, strengthening his control of the party and foreign affairs, such as the "One Belt, One Road" program.

“The economy has not been his priority. We understand that he receives a briefing on it for 30 minutes a day. Perhaps this accounts for the contradictory signals we see on economic matters,” he said.

One reason why Beijing pays little attention to these criticisms is the fact that it remains one of the world’s most popular investment destinations.

According to figures from the Ministry of Commerce, foreign direct investment in China in 2015 was US$126.27 billion, up 6.4 percent over a year earlier.

The top investors were Hong Kong (US$92.67 billion), Singapore (US$6.97 billion), Taiwan (US$4.41 billion), South Korea (US$4.04 billion), Japan (US$3.21 billion), the United States (US$2.59 billion), Germany (US$1.56 billion) and France (US$1.22 billion).

Many foreign business people believe that their golden age is over.

“In the 1980s and 1990s, outside companies were essential to China to provide capital, technology and management expertise. Beijing saw this clearly.

"But now China has a surplus of capital, increasingly sophisticated technology and tens of thousands of people educated and trained abroad.

"China is developing its own brands and acquiring many firms overseas. What is the edge we provide now? So the welcome we receive is diminishing.”

By comparison, the investment climate of Hong Kong is very welcoming, with its sophisticated legal system, unrestricted exchange of currencies, free access to information and the internet and limited government interference.

The Lee Bo case, the Mong Kok violence and diminishing media freedom are concerns but have not had a significant impact on inward investment.

Hong Kong remains the easiest city in China in which to invest.

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A Hong Kong-based writer, teacher and speaker.