Executive Summary
- The latest US-China Business Council (USCBC) assessment of China’s economic reform efforts is unchanged since our June 2015 report, as the impact on the top concerns of US companies remains limited. New policies released since the last scorecard show a few positive signals—and some negative signals—in key areas such as national treatment for foreign companies, market openings, government intervention in markets, and technology and security concerns.
- While China's top-line reform message of "letting the market play a decisive role" is compelling, the slow speed of reform and inconsistent implementation by central-level ministries in key areas cause continued uncertainty about whether policy changes will meaningfully address market access and level playing field concerns of USCBC members.
- Between May and mid-August 2015, China released a number of policies that create narrow openings or operational improvements for companies. Such actions include policies to open areas of the oil and gas industry to private investors (including foreign joint ventures); measures to boost rule of law in environmental protection; openings for foreign central banks to invest in the interbank market using RMB; and policies to promote pharmaceutical drug price reform. Such progress is reflected in data from USCBC’s 2015 member company survey, where just over half of respondents indicated they have seen some benefit from economic reform.
- However, these piecemeal steps forward fail to address the systematic issues impacting American companies in China, and are offset by other moves that are more restrictive. For example, one reform area most commonly touted by the Chinese government—streamlining licensing and reducing red tape— 77 percent of companies said they’d seen no progress. There have also been troubling trends that spur questions about China’s commitment to trade and investment liberalization—the “openings” part of China reform and opening policy. Provisions within the National Security Law and the draft Cybersecurity Law restricting cross-border data flows and requiring “secure and controllable” technology standards that effectively exclude foreign suppliers also raise new concerns on whether national security will be used for protectionist purposes.
- Other recent developments, such as old-style government intervention to check volatility in China’s stock markets in July 2015 and the sudden devaluation of the RMB in mid-August 2015, have spurred active debate about whether these moves are in line with the speed and direction of reform – and how much they reflect or impact the real economy. These moves have less impact on the business environment than the headlines suggest, but do raise questions about the direction, scope, and pace of reform.
- Looking forward, the next two months provide several opportunities to assess reform prospects: President Xi Jinping will visit the United States in September and deliver a policy address at a USCBC event; a package of reforms is under debate at the highest levels in Beijing, and may come out before the Xi visit; and the Communist Party’s annual major meeting will take place in October.
Since President Xi Jinping took office in early 2013, China’s senior government officials and central-level agencies have spoken widely about economic reform. The November 2013 Chinese Communist Party (CCP) Third Plenum—the third full meeting of China’s top party leadership during the 18th National Congress—was a turning point in the Xi government’s early economic reform efforts. Post-plenum documents and official statements said the market should play a “decisive role” in allocating resources—a change from previous statements that the market should play a “basic role.” Additionally, these same statements said that reforms should focus on improving the legal system, opening more areas to foreign and private investment, and changing how state-owned enterprises (SOE) are owned and operated.
While China’s top-line reform message of “letting the market play a decisive role” remains compelling, more specific signals about reform have been mixed, and few concrete and significant policies have emerged to implement the broad areas laid out for reform. The slow speed of reform, along with inconsistent implementation by central-level ministries, continues to create uncertainty about when—and even whether—policy changes will address the market access and level playing field concerns of USCBC members.
USCBC tracks reform developments to address two major questions:
- What tangible progress have Chinese central government agencies made toward implementing economic reform?
- What impact will reforms have on US companies and their operations in China?
To answer these questions, USCBC has compiled a list of reform-related policies since the start of the Xi administration. The current assessment includes nearly 30 months of data from March 2013 through mid-August 2015. These policies are divided into themes, such as the role of the state and the market, foreign investment, and institutional reforms. Given the stated role of the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ) as the “test lab” for reforms nationwide, this report also analyzes specific Shanghai FTZ-related policy announcements. USCBC will continue to monitor policies developed for the Shanghai FTZ and the three subsequent free trade zones in Fujian, Guangzhou, and Tianjin.
This report assesses the impact of China’s reform efforts on foreign company operations by rating each policy on its direct and immediate impact on foreign company concerns.
- Each policy is assessed as having either a “significant impact” (green), “moderate impact” (yellow), “limited impact” (orange), or “no impact” (red) for foreign company operations in China.
- USCBC’s overall assessment uses a three-color dashboard, rating China’s reform efforts as either limited, moderate, or significant based on their direct impact on foreign companies.
For more information about USCBC’s methodology, see Appendix 1. For USCBC’s complete list of reform-related policies, see Appendix 2.
USCBC Assessment: Impact Still Limited
USCBC’s latest assessment of China’s economic reform efforts still finds “limited” progress, with no improvement from our June 2015 scorecard. This latest assessment is based on a review of both new policies and a re-examination of previous policies to gauge their ongoing impact.
Between May and mid-August 2015, Chinese government agencies released a number of reform-related policies that address certain foreign company concerns, though in limited fashion. Yet despite such progress, there have also been a series of actions and policies that have raised concern about whether the market is being allowed to play an important role in the economy, as well as the impact of national security considerations in regulating the market. These mixed signals from the Chinese government are creating uncertainty among foreign business about China’s reform efforts, while holding China back from achieving its economic and development goals.
Among the reform-related policies tracked during this period, several aim to increase market openings and improve company operations. For example, the People’s Bank of China issued new rules to make it easier for international investors to access China’s interbank bond market, which was a step toward opening its capital markets and making the RMB an international currency. The oil and gas industry has also seen moderate market-access openings for private capital (and foreign investors through joint ventures) in oil and gas exploration as well as crude oil processing. Both notices create some openings for private capital (including foreign capital) in heavily monopolized sectors.
The Chinese government also made some strides on legal reform, increasing environmental compliance measures on pollution and providing a legal basis for public monitoring of companies’ environmental protection efforts. The tracking period also saw new policies allowing the market to play a more significant role in setting drug prices. Although implementation of the joint agency policy will determine its impact, the potential impact on the pharmaceutical industry as well as the overall health care sector is significant.
Such progress is reflected in data from USCBC’s 2015 member company survey, where roughly one-half of respondents indicated they have seen some benefit from economic reform. However, it remains unclear whether this benefit addresses companies’ core issues or even areas most commonly touted by the Chinese government: 77 percent of companies, for example, said they’d seen no progress from China’s efforts to streamline licensing and reduce red tape.
Furthermore, other central government actions call into question China’s commitment to market reforms. Developments in the technology sector raise concerns about the use of “national security” for protectionist purposes. For example, provisions within the recently finalized National Security Law and the draft Cybersecurity Law that restrict cross-border data flows and require “secure and controllable” technology standards for key network infrastructure are concerning trends for China’s commitment to opening its market to trade and investment.
Other recent developments, such as moves to check volatility in China’s stock markets in July 2015 and the sudden devaluation of the RMB in mid-August 2015, have spurred active debate about whether these moves are in line with the speed and direction of reform – and how much these moves reflect or impact the real economy. For companies, these debates only raise questions about the direction, scope, and pace of reform.
From a broad perspective, despite the number of reform policies released by Chinese government agencies since 2013 (more than 400 by USCBC’s latest count), many are still not broad enough in scope or specific enough in implementing detail to address foreign company issues. Instead, many of these policies address minor operational issues or are limited to particular sectors. Others do not clearly apply to foreign companies.
Senior government officials have stated that China’s overall economic reform plans will be implemented through 2020. The Shanghai FTZ was launched in 2013 with a three-year timeframe before its reforms would be implemented nationwide, though some of these policies have already been extended to other designated districts in Shanghai. Reform policies still have the potential to address foreign company issues before the above deadlines are reached, even if the practical progress so far has been scant.
USCBC encourages Chinese officials to take further steps to issue economic reforms that will benefit the Chinese economy by creating more openings for both foreign and domestic companies. Key steps include establishing concrete policies that liberalize investment, boost the role of the market in the economy, create a level playing field for foreign and domestic firms, and promote further legal reform.
For Appendix 1: Methodology; Appendix 2: Policy Amendments Related to Nationwide Economic Reform; Appendix 3: Policy Announcements Related to the Shanghai Free Trade Zone; and Appendix 4: Abbreviations for Chinese Government Agencies, please see the PDF file or SlideDeck above.
