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Foreign investors face curbs and lawless regime in China

Foreign investors face curbs and lawless regime in China
July 03
11:29 2020

NEW DELHI: China may be crying foul as some of its companies are being shut out of bids in other countries, but it has been for long following discriminatory policies against foreign investors.

In China, long-term visas are really difficult to get. Investors need to form a company and make an investment of either $500,000 in China’s underdeveloped west, over $1,000,000 in a central province, or $2,000,000 in any other region to get a Chinese investment visa.

Foreigners (and locals as well) can’t own freehold property in China. Every plot of land belongs purely to the state and can only be obtained on a 70-year leasehold at maximum. This makes business very difficult for real estate investors.

Stock investors also face severe restrictions. Foreigners can only buy “A-Shares” via Hong Kong, and one needs to open a Hong Kong brokerage account to do so. In addition, China relies on the Special Administrative Measures for Foreign Investment Access (known as the “nationwide negative list”) to categorise market access restrictions for foreign investors in defined economic sectors.

Foreign participation in many industries important to US investors remain restricted, including financial services, culture, media, telecommunications, vehicles and transportation equipment.

This makes things more difficult due to lack of transparency and lack of rule of law in China’s regulatory and legal systems, leaving foreign investors vulnerable to discriminatory practices such as selective enforcement of regulations and interference by the Chinese Communist Party (CCP) in judicial proceedings.

Some US businesses have reported that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that helps develop certain domestic industries and support the local job market.

Provincial and municipal governments will sometimes restrict access to local markets, government procurement, and public works projects even for foreign firms that have already invested in the province or municipality.

In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose IP content or provide IP licences to Chinese firms, often at below market rates. These practices run contrary to WTO principles.

China has also restricted the ability of both domestic and foreign operators of “critical information infrastructure” to transfer personal data and important information outside China, while also requiring those same operators to only store data physically in China.

Foreign firms also fear that calls for use of “secure & controllable” and “secure & trustworthy” technologies will curtail sales opportunities for foreign firms or that foreign companies may be pressured to disclose the source code and other proprietary information, putting the IP at risk.

China’s Property Law stipulates that residential property rights will renew automatically, while commercial and industrial grants shall be renewed if the renewal does not conflict with other public interest claims.

A number of foreign investors have reported that their land use rights were revoked and given to developers to build neighborhoods designated for building projects by government officials. Investors often complain that compensation in these cases has been nominal.

China also imposes requirements that US firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies. One in five corporations said that China has stolen their IP within the last one year.

According to a report, “The Digital Hand”, published by the European Union Chamber of Commerce in China, implementation of China’s Social Credit System (SCS) has the potential for discriminatory use towards international companies.

Some of the rating requirements apply equally to all market participants but are more difficult for international companies to fulfill. This appears to be the case for the State Administration for Market Regulations (SAMR) blacklisting mechanism for “heavily distrusted entities” which makes the SCS usable in trade conflicts.

Chinese companies have the advantage in navigating the intricacies of the system, potentially enhanced by better information flows from the government authorities.

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