Economies with a sophisticated and experienced financial sector such as the United States stand to receive more Chinese investment in the coming years.
There were several noteworthy positive investment policy developments in the first six months of in both the US and China, though obstacles to strengthening cr0ss-border investment remain on both sides. The US made progress in technical issues such as visa issuance, yet national security concerns remain a crucial impediment, particularly in regards to telecommunications and critical infrastructure.
Looking forward, second-generation policy issues such as competitive neutrality and equal market access are getting more attention from officials in the US and other developed economies. On the Chinese side, positive commitments have been made to open up financial services to greater foreign participation. However, several new policies to address risk management and the strong state involvement in outbound investment decision-making could potentially weigh on future outbound investment flows.
Several developments on the US side in H1 contribute to a positive outlook of the China-US investment relationship. The implementation of simplified visa procedures for business travel and tourism in the United States represented one of the most important positive policy developments.
The Beijing Embassy responded by assigning 50 new consular officers to facilitate more rapid processing of visa applications and reports that the average wait time for a consular interview was no greater than six days throughout China. Stipulations of the law that make it easier to reapply for visas should be especially welcome to Chinese nationals with investment interests in the United States.
Another notable development on the US side is the official rhetoric supporting Chinese participation in US infrastructure development that has emerged during the last few months. The official release contained the following:. The United States supports improving its infrastructure sector, enhancing market mechanisms for infrastructure investment, incorporating best practices and lessons learned from all applicable global infrastructure systems, and working to enhance Public-Private-Partnership PPP investment opportunities where appropriate, including from foreign investors… The United States and China recognize the potential for their firms to play a positive role in infrastructure financing in each country, and commit to explore opportunities for deepening cooperation in this field.
This positive rhetoric has yet to translate into actual investment projects, but the welcoming tone is a first step in the right direction. The main challenge firms will face in pursuing such projects will be finding ways and legal structures to participate more directly in infrastructure development without eliciting national security concerns. Whether or not this can be done successfully remains to be seen.
As these positive developments have emerged, other traditional difficulties faced by Chinese firms in the United States have continued or even intensified over the last six months. Telecommunications and information technology security concerns remain at the heart of the debate on Chinese investment and continue to impede Chinese equipment vendors Huawei and ZTE and increasingly telecommunications services providers from operating in the US market.
For example, the US government is reportedly considering denying operating licenses to China Mobile to provide service between China and the United States and build local facilities on national security grounds. The public debate on the seriousness of cyber theft threats is also not easing. To date, months of crafting and compromising have not been able to get a bill bolstering US cyber-security measures through Congress, although a recent report indicated that such a measure may have enough support in the Senate to make it to a vote sometime before the end of July.
Needless to say, telecom remains a very difficult industry to operate in for Chinese firms, and these security concerns are unlikely to diminish in the immediate future. The past six months have also shown that next-generation policy issues including reciprocity in market access, competition policy, and regulatory transparency are becoming increasingly important and could add to political risks for Chinese investors in the United States. In light of increasing Chinese investment, OECD policymakers have begun to focus more on symmetry in market access and competitive neutrality of state-owned investment vehicles.
The US increasingly intends to find leverage in the form of regulatory approvals to elicit policy concessions from China. In a March speech Secretary of State Clinton also suggested that US officials are increasingly ready to use Chinese investment interests in the US as leverage for achieving broader goals in US-China economic relations:.
As economic partners, we can make it possible for more people in both countries to work, trade, invest, create, and prosper. Whether we do or not depends on how we deal with some of our differences. China has things it wants, including more opportunities to invest in the United States, and we have things we want, including an end to discrimination against U.
US regulators and courts are also stepping up their actions against Chinese companies out of compliance with local regulations.
Among multiple recent examples is that of Puda Coal , against which fraud charges were filed by the SEC in February of this year. Some accounting experts are speculating that the SEC could delist all Chinese companies from US capital markets if an agreement is not reached.
Antitrust is another area in which the clash of different philosophies and regulatory frameworks has started to cause trouble for Chinese firms. The company defended its position by claiming that the Chinese Ministry of Commerce required the firm to coordinate production and fix export prices, and that compliance with Chinese regulations should supersede US antitrust lawMOFOCMs. Several other Chinese makers of vitamin C will face trial on November 5 th under the same price-fixing allegations.
The first six months of have seen a range of new policies promoting foreign investment with the goal of offsetting a drop in FX inflows.
With regard to inward FDI, the most significant development was the May announcement to raise the limit on foreign participation in joint ventures in the banking sector. In early July, SAFE also announced the elimination of regulatory supervision of FDI-related foreign exchange accounts and the abolishment of regular examinations on reinvestments of profits by foreign companies in China.
Proposed measures include streamlined approval procedures, greater technical and political support for investors, and relaxation of restrictions on individual and private sector investors. In short, the government sees the necessity of greater internationalization but is not willing to give up its tight grip on overseas investment flows, and will put even greater emphasis on risk management in the future. Several new policies in H1 reflect this stance. They also increase the accountability of executives for unsuccessful overseas ventures by introducing reporting and management requirements for overseas investments.
At the same time, the government announced measures to support outward investment by non-government controlled investors. In June, SAFE issued a circular that eases restrictions for Chinese firms on the cross-border transfer of foreign exchange.
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Greater flexibility in FX transactions will particularly benefit private sector firms, which are at a disadvantage when it comes to financing outward investment. In early July, several Chinese ministries announced a new policy initiative to promote outbound FDI by private firms. The policy package mostly aims at improving financing channels for private sector OFDI. Most importantly, the procedure for remitting foreign exchange back to China will be simplified by abolishing mandatory approvals for FX transactions related to overseas projects approved by the Ministry of Commerce MOFCOM.
It remains to be seen if these measures are more successful than past efforts to promote private sector outward investment to the US and elsewhere. In spite of past rhetoric, to date there has been no major change in the dominant position Chinese state-owned firms enjoy in pursuing investment activities abroad. In H1 , trends in Chinese government involvement in investment activities in the United States remained consistent with previous years. While private firms dominate in terms of number of deals, the value of investment deals from government-owned firms average considerably higher than those made by private firms, both for greenfield and acquisitions Table 1.
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