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Will China remain open to foreign investment? What sort of foreign investors will Chinese companies be? Will they play by international rules? And what will be the effect of China's involvement in other economies?
See below the questions and answer from this online debate that took place on Wednesday 17 January with OECD economist and China investment expert Ken Davies.
Q. What would be a feasible strategy for exporting countries to win markets from China, that has flooded them with artificially cheap products?
José Sergio Osse, Repórter
A. Your question suggests that China's export success is due to sales at subsidised, below-cost prices. If that were true, these exports would have been blocked under anti-dumping rules. This has happened in a few cases, but is not universal. China's products are cheap mainly because labour costs are low. Competing with Chinese enterprises in other countries, and in China itself, is therefore difficult on price grounds, except for companies located in countries with similar resource endowments. Companies that are competing successfully with Chinese enterprises therefore largely do so by concentrating on product quality, innovative technology and other non-price factors. Governments wishing to foster such successful companies might do so by perfecting the domestic competitive environment and investing in human capital, particuarly education and training.
Q. What sort of foreign investors will Chinese companies be? Will they play by international rules?
Samuel Brookes, UK
A. Some play by the rules, others don't. The challenge is to make sure they all do, and China is trying to meet this challenge. The rest of the world can help.
A few Chinese companies started to invest abroad in the 1980s, but only started making very large investments after the government promoted its "go global" policy at the beginning of this decade. So Chinese enterprises have less experience of investing abroad than do enterprises in most OECD countries. Some Chinese enterprises have already encountered problems complying with national laws in countries in which they operate, let alone acting in accordance with behavioural norms that reflect societal expectations. (The same may also be true of their compliance with law and societal expectations in China.) Such non-compliance can be a problem for workers in such enterprises as well as for competitors, and it can develop also into a problem for the enterprises themselves if the result is business failure. So the Chinese government and Chinese multinationals are themselves increasingly striving to understand and apply internationally-recognised norms of responsible business conduct (RBC) in co-operation with international organisations such as the OECD.
Q. China's framework for regulating foreign investment is overly complex, non-transparent and restrictive. Some of the most important barriers to foreign investment have been highlighted by the OECD's review of China's policies applied to cross-border M&As. Does the OECD see signs of any real impact of its policy recommendations to reduce investment barriers on policy debates and policy making in China ?
To what extent are recent statements by Chinese government officials alleging domination of whole sectors by foreign investors and calling for "severe measures to curb and punish hostile takeovers aiming to monopolise the Chinese market", as well as the 11th Five Year Plan with its increased emphasis on economic nationalism and self-reliance, indicative of an increasingly negative attitude of the Chinese government towards foreign investment?
Ms. Yulya Truskinovsky, BIAC
A. The impact may be limited, but it is there, even if undeclared. For understandable historical reasons, China's leaders tend to avoid stressing foreign influence on laws, regulations or codes of behaviour. As part of its long-term co-operation with China on investment policies, the OECD has published two Investment Policy Reviews of China (Progress and Reform Challenges in 2003 and Open Policies towards Mergers and Acquisitions in 2006) offering China policy options based on reducing FDI restrictions and making its rules more transparent. In the continuing debate on FDI policy in China, arguments for increased investment openness have been used that parallel those in the OECD's two Reviews.
It would be an exaggeration to characterise the Chinese government's attitude towards foreign investment as negative, despite rhetorical flourishes from some officials suggesting that FDI is "malicious". Recent additional screening procedures for cross-border mergers and acquisitions and the recently-issued list of industries over which the Chinese government says it will retain control reflect instead a more selective approach to FDI. To some extent this reflects attitudes in other countries to cross-border M&A transactions that are perceived as affecting national security, including one case involving a Chinese enterprise attempting to acquire a US company. It also appears at a time when China has plenty of money. By end-2006, China had over USD1 trillion in foreign exchange reserves. In 2006, FDI reached a record USD63 billion (USD69.5 billion if investment in banks, insurance companies and securities houses is included) and the trade surplus rose to USD177 billion.
However, it is important not to be complacent. Investment protectionism, whether in China or elsewhere, is a threat to the free flow of capital and therefore economic efficiency. The OECD has started a process of consultations on this (see below) and China has started to become engaged in this. We continue to encourage China to reduce FDI restrictions and develop an open, transparent and non-discriminatory rules-based framework for investment, including both domestic and foreign investment. As an increasingly important provider of FDI to the rest of the world, China clearly has a strong interest in maintaining an open international market for investment.
Q. We all know the history,what has happened to USSR and Japan. In 1970’s we all extrapolated that these countries will surpass US GDP. Yet, USA is the biggest economy in the world.
Second we know the growth theories, China can only ‘catch-up’ the US economy but cannot go further. So I believe that there is a natural balance ‘like in Arbitrage Theory’, that the world will benefit from China until China’s economic growth increases the price level and that will also lead to an increase in wage rates. Also as a country's productivity rises, their real exchange rate appreciates. Then, as production costs rise, the US and the rest of the world will stop importing goods from China.
Do you think that this scenario works or am I making a specification error?
Orhan Yarar, Istanbul Bilgi University
A. China is already experiencing wage rate increases, at least in the more developed regions, and its exchange rate is gradually appreciating (it has just passed the Hong Kong dollar on its way up against the US dollar). However, the scenario you depict is still a long way off. There is a huge reserve of surplus labour in China generated originally by productivity improvements resulting from the reform of agricultural production in the early 1980s and added to by redundancies resulting from the reorganisation of inefficient state-owned industries. This reserve is variously estimated at between 100 million and 300 million people; even at 100 million it is larger than the total workforce of most other countries. There are also regions of China where resources are less intensively exploited compared to the industrialised coastal area. So the potential for continued economic development based on low-cost resources exceeds that of Japan in the 1960s and 1970s.
Unlike the USSR in the 1970s, China no longer has a centrally-planned siege economy, is continuing to reform its economic institutions, and is developing domestic demand by encouraging household consumption. Even when China's dollar GDP exceeds that of the United States, individual incomes in China will still be far below those in the US. But you are right in signalling the importance of moving from a competitive advantage based on low labour costs, which is being eroded by the emergence on the world economic stage of other developing countries such as India, towards one based on innovation and high quality. China's efforts to develop R&D centres and to promote technology transfer through both inward and outward FDI show that its leaders are aware of this.
Q. How can investors effect the situation in China? Lobbyism? Will they be ignored?
Jesper Beck, Research assistant, Zhejiang Businessmen magazine
A. China is a sovereign country and has the right to regulate as it sees fit within its borders. However, China can benefit from a more transparent, open and non-discriminatory regulatory framework, one in which policy-makers and legislators take account of information and opinions of those affected by legislation, including foreigners as well as Chinese citizens.
The Chinese government committed itself to transparency when it adhered to the WTO. This is a major development in a country without a long tradition of open public consultation on law-making. Foreign investors and their representative organisations have indeed been increasingly consulted in recent years on legislation relating to FDI. However, consultations are not always complete, timely, or effective. As a result, China sometimes adopts imperfect laws that generate debate after promulgation and have to be qualified months later by implementing regulations. China is instead encouraged to develop methods of stakeholder consultation that help it to improve legislation during drafting, including open discussion in the media. Lobbying is not unknown in China, where it is usually covered by the term "guanxi" (literally, "connections"), but, as elsewhere, it does not ensure comprehensive consultation with all interested parties.
Q. What does the OECD recommend EU should do to link Trade and Social Policies (Core Labour Standards) in future trade deals with Asian countries (India, South Korea) and what about China?
Paul Lidehäll, TUAC Working Group on Global Trade & Investment
A. Whether or not social policies are included in any future trade agreement between the EU and China, Europe has already had a direct impact on the Chinese government's approach to responsible business conduct (RBC). After complaints about unfair labour practices in the Chinese textile industry threatened European textile imports from China, the Chinese government developed and adopted the CSC9000T Social Responsibility Management System for the textile and apparel industry. Studies are now being conducted to consider extending CSC9000T to other industries.
The Chinese government is also motivated to encourage RBC by its concerns over the need to secure commitment from enterprises to help enforce occupational health and safety legislation nationwide and by its desire to equip Chinese enterprises to operate in other countries in response to its encouragement to them to "go global". Some large Chinese companies are also actively developing RBC programmes, not only for their overseas activities but also to enhance their reputations on stock exchanges in China and elsewhere.
The Chinese government is working with the OECD to improve the understanding by Chinese managers of internationally-recognised RBC norms, in particular those embodied in the OECD Guidelines for Multinational Enterprises. This project is supported by a joint declaration issued last month by the Trade Union Advisory Committee to the OECD (TUAC) and the Business Advisory Committee to the OECD (BIAC).
Q. What are the chances that China not will be open to FDI?
Jesper Beck, Research assistant, Zhejiang Businessmen magazine
A. China will remain open to FDI. However, as in many other countries, there may be occasional moves to restrict investment in cases where essential national interests are perceived to be threatened. Investment openness can best be guaranteed by improvements in China's rules-based institutional framework and by international co-operation to avoid investment protectionism.
China has become one of the most open economies in the world, with trade accounting for a higher proportion of GDP than in many more developed economies. Foreign direct investment (FDI) has been allowed in many areas of the economy. Look around China's cities and you see many major international brands, and on products that are now made in China, not just imported. China has gained many benefits from FDI, including--but not limited to--technology transfer, widening of consumer choice and increased employment. After 33 years of opening up to trade and investment, it is inconceivable that the Chinese government would consider closing the door and returning to the failed policies of central planning and autarky. China has repeatedly promised foreign investors that its policy of investment openness will not change, and in recent years has promised to become even more open: for example, before acceding to the World Trade Organisation (WTO) at the end of 2001 China committed itself to opening up its services sectors to foreign investment.
However, China is not immune from the current tendency worldwide to look at inward FDI flows more carefully in the light of concerns about national security other perceived national interests. Last month the OECD published a statement on the Regulations on the Acquisition of Domestic Enterprises by Foreign Investors that came into force in China on 8 September 2006 (details in the link below). These regulations introduced a new screening requirement on transactions in which a foreign investor acquires a company in a major industry, or where an acquisition by a foreign investor might have an impact on "national economic security" or result in the transfer of a "famous trademark" or "traditional brand". Since these terms are not further defined in the legislation, it is difficult to determine in advance the probable result of such screening. The OECD recommended that China reconsider the additional screening procedure. Meanwhile, the legislation could be made more transparent by the publication of a clear definition of the above-mentioned criteria.
China is participating in the Roundtables on Freedom of Investment, National Security and "Strategic" Industries at the OECD in Paris alongside OECD member and other countries adhering to the Declaration on International Investment and Multinational Enterprises, and other non-OECD countries. The aim of the Roundtables is to avoid a spiral of defensive measures that inhibit incoming investment by enabling countries to build mutual understanding and mutual trust. A key outcome could be a shared view of least-restrictive practices in the national interest and mechanisms of international co-operation, including joint monitoring.
Q. China has been a major challenge for those who own Intellectual Property and for those who carry a strong brand in the global market.
Counterfeiting is not only a threat to the economy of those who invest in research & development and branding but is also a threat to our safety as counterfeited products do not present the same safety features of those original equipment.
Every year millions of products are removed from the market after being proved to be poor falsification of original brands but other millions are sold exposing our society to the risk of fire, electrocution, environmental destruction, etc...
What do you think would be the solution for this huge problem? How can we make the Chinese government and businessmen aware of the consequences of this irresponsible attitude and change their behavior?
Name withheld upon request
A. Protection of intellectual property rights (IPR) is a problem with deep roots in China that the government has been striving to address since economic reforms began in 1978 but which needs further efforts to resolve. It is not just a problem for foreign investors: widespread IPR violations also threaten domestic innovation.
In the 1980s China laid a firm legal foundation for IPR protection and by the mid-1990s had adopted comprehensive legislation covering trademarks, patents and copyright. At the same time it adhered to international agreements on IPR protection. Recognising that many people in China do not understand the concept of IPR, the government has launched education campaigns, for example distributing texts of the law and explanatory videos; millions have attended IPR training classes. There has also been widespread training of officials in co-operation with international organisations such as the World Intellectual Property Organisation. As in other countries, there have been numerous campaigns to seize and publicly destroy fake products. Unlike some other developing countries, there has been no public backlash against IPR protection measures. On the contrary, Chinese domestic enterprises, who suffer from piracy and counterfeiting as do foreign-invested enterprises, are also calling for stronger IPR protection. Partly as a result of these efforts, the number of patents filed in China is increasing.
However, more needs to be done to ensure effective IPR protection in China. Major trading partners like the European Union continue to report that China is the source of a disproportionately high share of counterfeit goods entering their territories. Flagrant copying of products from DVDs to automobiles remains rife. And it is not only competitors who suffer. Counterfeit goods may be dangerous: a case in point is that of soy sauce, where numerous fakes containing chemicals injurious to health were sold internationally under the name of a famous Chinese brand, threatening consumers and damaging the original brand.
In the OECD's 2003 Investment Policy Review of China, we pointed out that the problem had been aggravated by the move of counterfeiting out of Hong Kong, China and Chinese Taipei as a result of successful pressure by OECD members such as the United States, and by the improvement of China's technological capacity during its recent industrialisation. We diagnosed the current problem as resulting from a lack of legal precision and incomplete enforcement of existing legislation, as well as a continued lack of public acceptance of this legislation and of the concept of intellectual property itself. We proposed that China: continue to educate citizens in the principles of IPR protection and its value for the promotion of discovery and invention; allow all holders of copyright, patent rights and trademark rights to seek enforcement of those rights; establish minimum penalties for all categories of IPR violation; provide means of sharing experience of best practice in IPR courts nationwide to enable upgrading of courts in hinterland areas to standards already set in major cities like Beijing; detect, punish and deter software piracy on the part of manufacturers, wholesalers, retailers and the general public and other end-users, including businesses and government departments; and close down wholesale markets in which counterfeit goods are widely sold.
Q. What will happen in the future? Will FDI in China grow or will some investors move to India, Vietnam, or East West Europe?
Danuta Pawlowska, Warsaw
A. China has become the largest recipient of foreign direct investment (FDI) among developing and transition economies. It is still top of the list of preferred FDI destinations in opinion surveys, but other developing countries are becoming more attractive to foreign investors. There is still plenty of scope for further expansion of foreign investment in China because important sectors of the economy are still in the process of being opened to foreign participation as a result of China's WTO accession agreement commitments, especially in services. One example is the financial sector. The OECD also expects the overall economy of China to grow rapidly, with consumer spending perhaps rising even faster, making China an even more attractive market in which to establish a commercial presence. So FDI will probably continue to grow in China, though it is unrealistic to forecast precisely how fast.
Other countries like India and Vietnam have noticed the success of China's reforms and have embarked on their own process of economic reform and opening up to investment and trade. To the extent that their labour costs are lower than those in the coastal areas of China, where industrial growth is now boosting wages, they may be able to divert some labour-intensive FDI away from China. They may also have specific advantages over China, for example the English language skills in India that have allowed it to attract call centres from Europe and North America. But if the foreign investment cake is growing, China can still benefit from increasing FDI inflows even though other developing countries are taking larger slices. To do that, it has to continue improving its investment environment.
Q. Why do investors love China? Because of its domestic market, consumption, or just the costs of production?
Danuta Pawlowska, Warsaw
A. China is a rapidly growing market. The old pipedream of selling a toothbrush or a pair of shoes to every Chinese has been replaced by the reality of a China with over 437 million mobile phone subscribers at the end of last year. Not all products are in such high demand, but consumer goods ownership is rising rapidly and Chinese consumers are happy to buy foreign brands if they are value for money. China is also an attractive base for export manufacturing: approaching 60% of the country's exports are produced by foreign-invested enterprises. True, Chinese wage rates are far lower than in developed countries, so companies can lower their labour costs by setting up production facilities there. But other countries have even lower wages, so why choose China? China has many other advantages, including: relative policy stability; good communications; good basic skills; rapid economic growth.
The opinions expressed and arguments employed on this page do not necessarily reflect the official views of the Organisation or of the governments of its member countries.
Background reading
OECD recommends China to reconsider its new rules on cross-border mergers and acquisitions
China's trade and growth: impact on selected OECD countries
China and India: what's in it for Africa?
Angel or devil? China's trade impact on Latin American emerging markets
China will become world's second highest investor in R&D by end of 2006, finds OECD
Made in China
China should cut barriers to foreign investment
China could become world's largest exporter by 2010
More on the OECD's work with China
Read the questions and answers from recent debates
Russia: will the boom bust?
Grappling with the world's new IT giants
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