Market rejoices foreign firms’ entry to newer sectors

A neat rally lasting five consecutive trading days with the Shanghai Composite jumping the ‘psychological point’ of 2,300 midweek, came in recognition of some stunning news. From now, fewer economic and investment activities in China will be subject to approval from central authorities.

Investment in large oil and gas fields, and airports no longer need to go through a long administrative approval process. Last week, the state cabinet published a list of items that no longer require central government approval and have been delegated to lower-level authorities for clearance.

Powerful planning agency, National Development and Reform Commission, also revised its policy guidelines to encourage more foreign investment, especially for the industrial upgrade of the underdeveloped central and western regions. The new guidelines, which will become effective on June 10, include details of favourable policies and incentives being offered in mostly labour-intensive industries and service sectors.

China, which has very stringent limits on sectors in which foreign companies can participate in, has now expanded this scope. Foreign investors will now get entry to a total of 500 types of sectors, across 22 provinces and regions. Included in the new list are producers of natural mineral water, makers of passenger liners, deep-ocean machinery, developers of leisure agriculture projects, and the surprise niche segment of golf kits.

The more exciting possibilities are reserved for modern service providers such as those in cloud computing, Internet of Things, and mobile Internet sectors. The NDRC has also selected the less developed provinces of Shanxi, Heilong-jiang and Shaanxi for special treatment. In the first four months of this year, the use of foreign funds in central and western areas rose 5.7 percent and 25.7 percent respectively. These regions are being aggressively packaged to foreign investors due to their relatively lower labour costs and growing links with Southeast, South Asia, and also Eurasia.

Competition needed

The radical guidelines for foreign investment are the third version since these were first introduced in 2000 to attract as well as restrict foreign participation. In fact, given the conservative nature of Chinese planners, the market was stunned by the speed with which authorities have, in principle, streamlined an intimidating approvals regime. Lowering financial thresholds for investors, especially foreign ones, is likely to keep stock market spirits high for some time. Also, there is good reason for the red carpet to be drawn wider for foreign investors.

The competitiveness of China’s traditional industries is weakening, while its efficiency in new and emerging sectors is still not world-class. A report published by the Chinese Academy of Social Sciences puts an unusual U-shaped curve to China’s industrial performance. Its competitiveness in some low-and high-end industries remains strong, while it is much less competitive in some medium-end industries. Even its enviable performance in high-tech industries is attributed to favourable government policies and heavy subsidies.

China’s traditional strengths used to lie in agricultural products and high-energy consuming, high-pollution and resource-intensive industries. The old way of enhancing industrial capacity was to set up mega industrial parks and give away cheap land and capital to local enterprises. This has resulted in terrible overcapacity, even as core technologies remain out of reach for Chinese companies. But unlike other developing nations, Chinese planners are quick to identify problem areas and micro-manage the solutions. For instance, China is acquiring new strength in shipbuilding, but when it comes to the sophisticated technology of building ship engines, Chinese companies fall behind. The gap in core technology is particularly galling for the Chinese - which is why they are ready to lure in foreign competition.

China’s think-tank now realises that administrative intervention and macroeconomic policies should play only a limited role and market forces have to come into play if China wants to reach an advanced industrial stage. Greater foreign competition no doubt will help build a fair, competitive environment in which innovative companies can thrive and enterprises dependent on state largesse allowed to fail.

The writer is a freelance journalist based in China.