Steps Forward Undermined by Steps Back
The latest US-China Business Council (USCBC) assessment of China’s economic reform efforts has not changed since the previous update in February 2016. Although some positive steps were made in a few areas, setbacks and counterproductive policies persist, and doubts remain about the government’s follow through on the three-year old pledge at the Third Plenum to allow the market to play a “decisive role.”
In the first nine months of 2016, Chinese government agencies released several policies that show incremental positive movement in a few areas.
Recent liberalizations in China’s financial sector include the ability for foreign firms to directly trade more products in China’s inter-bank bond market, the relaxation of quotas for Qualified Foreign Institutional Investors (QFII), and the nationwide expansion of a free trade zone (FTZ) pilot that seeks to improve cross-border financing mechanisms for foreign firms.
The State Council announced a regulatory review mechanism intended to ensure fair competition in the market. The system requires government agencies to self-review policies and eliminate anti-competitive components before implementation. While these changes would be positive, the mechanism lacks a process to enforce compliance.
China revamped its tax regime for the services sector by replacing the decades-old business tax with a value-added tax, which largely aligns with international practice.
In that same period, there were several setbacks for reform.
Highly touted reforms to the nationwide system managing inbound foreign direct investment implemented in early October failed to introduce any new sector openings and, after bureaucratic infighting, failed to use the “negative list” piloted in free trade zones over the past three years. Top leaders had repeatedly pointed to the free trade zone pilot as the next wave of reforms and openings.
Meaningful state-owned enterprise (SOE) reform remains largely stagnant. While some initial steps to address overcapacity in certain sectors have been announced, SOE reform to date largely favors government-directed industry consolidation and allows struggling borrowers to swap bad debt for equity, rather than promoting or encouraging bankruptcies, acquisitions, and commercial restructuring that would be expected in a market-driven approach. SOE corporate governance also remains untouched.
Additionally, there has been a lack of movement on other major systemic issues affecting American and other foreign companies in China. For example, mandates to use “secure and controllable” technology in key sectors operate as a de facto market access barrier, as many end users assume that Chinese technology is necessary in order to comply with new and existing measures and make purchases accordingly. Chinese regulators also continue to issue problematic regulations that prohibit cross-border data sharing. These types of regulations disrupt the flow of information for firms whose efficient business operations and security rely on smooth global communications.
The 13th Five-Year Plan, released in March 2016, highlights the need to expand sector openings, reduce market access barriers, and encourage foreign capital and advanced technology to improve the overall quality of foreign investment in China. However, these statements remain aspirational. Changes from Third Plenum reform priorities to the “supply side” reforms in the 13th FYP leave doubt about whether—and to what extent—policy changes will have a meaningful effect on market access or help level the playing field for foreign companies. Tangible reforms, such as reducing foreign ownership restrictions in key sectors, would boost business confidence in China’s reform policy direction.
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