An opportunity for China to improve ties with foreign investors

Signs that China’s economy, the world’s second largest, may flirt with recession in the second quarter of this year are worrying for global growth. But they provide Beijing with an opportunity. It could use these sobering indications to reconsider not only aspects of its “zero-Covid” policy but also its treatment of foreign direct investors; what is good for them is good for China’s own economy.

Foreign investors have poured hundreds of billions of US dollars into China’s economy since the mid-1980s, helping to foster a transformational economic boom that has lifted 850mn people out of poverty. Foreign companies have also transferred technology to Chinese counterparts, trained staff in crucial roles and assisted in opening overseas markets to Chinese-made goods.

Some came spectacularly unstuck in the world’s biggest potential market. But many multinationals made handsome profits — and became the strongest pro-China political lobbyists back in their home countries. Now, surveys are showing rising disillusionment among foreign investors, many of whom plan to shift investment out of China.

Such sentiments do not derive solely from China’s muscular zero-Covid policies, though cancelled flights, visa complications and lengthy quarantines have contributed to the frustrations of foreign executives. The deeper roots of disaffection lie in a sense that doing business in China has become harder as Beijing’s rivalry with the west intensifies.

While the US screens some selected investments through the Committee on Foreign Investment in the US (Cfius), would-be investors in China must navigate a labyrinth. They must check the business they wish to start is not on either of two negative lists and then seek regulatory approval if it falls into one of a further 550-plus different categories.

Once a foreign business is up and running, it may receive pressure to transfer technology to Chinese counterparts, sometimes as part of the “Made in China 2025” strategy, which envisages boosting the market share of domestic competitors over time. Under the Foreign Investment Law of 2020, a national security review may be required for a project that “affects or may affect national security”. Other recent laws have added to the complexity. The Data Security Law and Personal Information Protection Law, both passed last year, sharply restrict the handling of customer data and its transfer overseas.

Add to that the current slump in growth amid strict Covid policies, and it is no surprise that some leading foreign investors are sounding gloomy. Michael Hart, president of the American Chamber of Commerce in China, has warned of a potentially “massive decline” in investment “two, three, four years from now”. Joerg Wuttke, president of the EU Chamber of Commerce in Beijing, has said unpredictability is prompting Europe’s business community to put investments in China “on hold”. 

Understandably, the welfare of foreign investors may not be uppermost in the minds of Beijing’s leaders. In April, retail sales were down 11.1 per cent year on year, industrial production fell by 3.2 per cent, unemployment rose, exports slowed significantly and credit extended by the banks also slid back.

Shanghai’s limited reopening after two months of lockdown is a welcome signal that China may be easing its zero-Covid mantra, and there are signs activity may be ticking up in response. But Beijing should also take steps to demonstrate that foreign investors remain a valued part of the economy. Official statements to this end would set a positive tone. But a real focus on reducing red tape and ensuring equal treatment with local competitors would alleviate some of the gloom descending upon China’s foreign business community.