China – New Investment Law Leaves Gaps
The recent annual convening of the so-called “two sessions” of China’s legislative bodies, the rubber-stamping NPC and the advisory CPPCC, resulted in the approval of a revised foreign investment law that will take effect in 2020. Details have not yet been published, but Premier Li Keqiang has assured that changes to intellectual property rules will provide a proper mechanism for recovering damages, and there will be welcome revisions to the negative list for foreign investment.
Provisions putting an end to forced technology transfers will be of particular interest to US negotiators currently engaged in trade talks with Beijing. The speed with which the law was drafted and approved suggests that the trade dispute with the US has inflicted real damage onthe Chinese economy, and officials in Beijing are keen to seize the opportunity created by the pause in an escalating tariff war to address US (and European) concerns about the manner in which China does business.
That said, it is not at all clear to what extent western firms will be able to obtain market access unfettered by state interference and fully protected by international law. Article 40 of the old has been retained, granting the government the authority to take any action against foreign businesses it deems appropriate according to the principle of “perceived negative reciprocity.” Moreover, China retains the right to screen investments for “security risks,” a concept so vaguely defined as to potentially include mere competition with domestic firms. In addition, all of the fine details still require the approval of the State Council. As such, foreign investors are probably wise to contain their enthusiasm pending evidence of how the law operates in practice.
Exactly how much damage the economy has incurred is unclear, as growing signs of rising political and social tensions—including reports that hundreds of thousands of Uighurs and other Muslims are being held in detention camps, and the significant tightening of security surrounding the “two sessions” event—have contributed to speculation that the situation may be much worse than the official figures suggest. Perhaps tellingly, the government has released official documents outlining proposals for fiscal expansion, involving tax cuts and infrastructure improvements, and options for monetary policy stimulus, and supply-side structural reforms.
Officially, the pace of real GDP growth decelerated from a revised 6.8% in 2017 to just 6.6% last year, the slowest pace since 1990. By design, real growth will continue to slow as consumption replaces investment as the key driver of economic expansion. However, the broad range of proposed measures to stimulate the economy and reports of tightening credit terms and a rise in corporate bond defaults do not gibe with the government’s growth target of 6.2% in 2019. Some China-based research groups argue that the economic growth rates are closer to 2%, although such assessments may reflect methodological differences, rather than fudging of data. Whatever the truth, there is ample evidence that China is facing economic headwinds that will create political challenges for leaders in Beijing.
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