【Zhao Hai】Decoupling will not 'make America great again'

社科院世经政所全球战略智库

The ongoing trade war between the world's two largest economies has caused great turbulence in the market and one of the most badly hit areas has been China's investment in the United States. China could take more measures to improve the business environment for foreign investors. Ultimately, making more efforts to strengthen market economy is the best way to offset the impact of the seemingly intractable trade war with the US as well as pursue high-quality economic development.

The ongoing trade war between the world's two largest economies has caused great turbulence in the market and one of the most badly hit areas has been China's investment in the United States. Latest statistics show Chinese investment in US commercial property in the 12 months through September dropped 76 percent year-on-year.

During the four years of former US president Barrack Obama's second term, Chinese foreign direct investment in all US industries totaled $88.7 billion, peaking at $46.5 billion in 2016. But after the current US administration launched a trade war and built higher investment barriers against China, total investment plummeted 82 percent from $29.7 billion in 2107 to a mere $5.4 billion in 2018.

A number of other negative factors have also been at work, such as the economic slowdown in China, tighter capital controls, deleveraging of foreign holdings, and stricter scrutiny by FDI destination economies. For instance, China's FDI in the European Union, too, declined from the pole position of $41 billion in 2016 to $19.1 billion in 2018, a 53 percent drop.

But it is the US federal government's hostility toward Chinese capital in the name of national security that best explains the more dramatic slide in Chinese investment in the US. The hostile measures include regulatory empowerment of the Committee on Foreign Investment in the US(CFIUS), expansion of the export control list, disruptive intervention in scientific and technological cooperation, use of long-arm jurisdiction and imposition of (or threat to impose) additional tariffs on almost all Chinese goods.

The US Foreign Investment Risk Review Modernization Act of 2018, aimed at modernizing CFIUS to deal with external "threats", is more discriminatory toward China. Before the act was promulgated, CFIUS had already redefined "national security", altered the review process, and tightened checks on specific industries and countries. Since 2012, China has been on top of the CFIUS transaction list, and the review rate of Chinese investment cases is far higher than any other country's.

Some might fancy the idea of uniting US elites and boosting US economic and technological development through a cold war with China, but as former US treasury secretary Henry Paulson argued in a recent speech, titled Delusions of Decoupling, comprehensive decoupling of the two countries, buttressed by military logic and conspired by the China hawks in Washington will not "make America great again" in any meaningful way.

In contrast, China has no intention of following in the US' footsteps to curb or harass inbound foreign investment. China will not only open its doors wider, but also continue to deepen reform to improve its business environment and create a level playing field for foreign investors. So far, some of the measures have increased foreign investment in China, with the Ministry of Commerce registering a 6.6 percent growth in the use of foreign capital in the first 10 months of 2019.

Ever since People's Bank of China Governor Yi Gang said at the G30 International Banking Seminar in Bali in October 2018 that China's central bank would adopt the principle of "competition neutrality", China has been reducing subsidies to and support for State-owned enterprises in line with international norms.

The newly created State Administration for Market Regulation has continued implementing the Fair Competition Review System, penetrating 98 percent of the municipal and 92 percent of the county-level governments, effectively eliminating local protection, designated transactions and market barriers.

Earlier this year, China implemented reduced State subsidies in a key industry－electric cars. The new policy abolished local subsidies and cut overall subsidies by more than 50 percent. In fact, all financial subsidies for electric cars will be phased out in 2020. Already, the Tesla Model 3, made by the Shanghai Gigafactory, a wholly owned Tesla plant, is exempted from vehicle purchase tax and eligible for electric car financial subsidy, just like any other Chinese manufacturer.

China's foreign investment negative lists have been shrinking since 2011; 75 percent of restrictions were scrapped by 2018. In 2019, the sectors restricting foreign investment in pilot free trade zones fell to 37, and in non-FTZ areas to 40. Though many industries are further opening-up to attract foreign investment, none has opened faster or wider than the financial industry. A document issued by the State Council, China's Cabinet, recently shows that by 2020, China will abolish 51 percent ceiling for foreign stakes in futures, mutual funds, securities firms and life insurance companies. And all restrictions on the scope of business for financial institutions will be canceled.

Besides, the Foreign Investment Law, which comes into force on Jan 1, will give ample protection to foreign investors. As for intellectual property, government agencies and officials are prohibited from forcing any technology transfer or disclosing confidential business secrets to others. Since 2017, the Supreme People's Court has established 19 specialized regional IP courts in China. Last year, local courts received 13,545 IP related cases, a 53.57 percent increase over 2017. And the World Intellectual Property Organization ranked China 14th in the 2019 Global Innovation Index.

Also, China has kept lowering its average tariff in line with its commitment to facilitating trade and various free trade agreements. Based on Peterson Institute for International Economics' analysis, China's average tariff has dipped from 8 percent at the beginning of 2018 to 6.7 percent.

With the signing of the Regional Comprehensive Economic Partnership and a potential investment deal with the European Union next year, China is on track to attract more foreign investment. According to an American Chamber of Commerce in China survey, 80 percent of the respondents said the investment environment in China is unchanged or improving－with US direct investment in China growing 7.7 percent in 2018.

China could take more measures to improve the business environment for foreign investors, such as to further shorten the negative lists, allow sole foreign ownership in some more service industries, establish a complaint and settlement mechanism for foreign companies, reinforce foreign credit reporting system and IP court authorities, and improve its FTZ policies. Ultimately, making more efforts to strengthen market economy is the best way to offset the impact of the seemingly intractable trade war with the US as well as pursue high-quality economic development.

（本文发表于China Daily 2019年12月18日）