31 Jan Open For Foreign Business: China’s New OpenDoor Policy

On January 17, 2017, the same day China’s President, Xi Jinping, defended globalization at the World Economic Forum in Davos, its Premier, Li Keqiang, signed China’s action plan to make the world’s secondlargest economy a force, in a littlenoticed Notice issued by the State Council.

Call it China’s New OpenDoor Policy.

The title isn’t heady: “Some Measures to Expand China’s Openness and Aggressively Utilize Foreign Investment Capital.” The concept is anodyne: “Use of foreign capital is an important element in our nation’s fundamental policy of openness and its open economic model.” And the prescription isn’t new: “Take openness a step further, level the competitive playing field, work harder to attract foreign capital.”

But as a guide to how China’s economy is changing course and where it is headed, it should be required reading. (Here is one English translation.)

“We (China) must promote a new level of openness using the guiding principle of development through openness.”

The State Council says it wants China to upgrade its capital base, foster innovation and develop the talents of its labor force. To do this, China will need foreign investment and know-how.

In the past, China only partially opened its doors to protect domestic players in fragile or politicallysensitive sectors. The Notice requires constraints on foreign entry to be relaxed for certain types of businesses in key industries. Reading between the lines, these fragile domestic players are not coming up fast enough to give the economy the lift it needs.

China will let in more banklike financial institutions, security companies, security investment fund managers, futures firms, insurance companies, insurance brokers, accountants and auditors, architectural design, and rating services. (Note: China has been on the verge of opening its futures industry to foreign companies for years.) Other sectors include telecommunications, internet, culture, education and transport: some of China’s fastgrowing service sectors.

Manufacturing and basic industries, including mining, are also on the list.

In recent years, these sectors have absorbed large quantities of “entrusted loans,” loans funded by companies that lack experience in underwriting and are seeking to park their idle cash for a larger return. Entrusted lending, which totaled $1.8 trillion USD (12.06 trillion RMB) in June 2016, is an unresolved and growing segment of China’s shadow bank market. Loans from stateowned banks to the mining sector also make up a material amount of collateral in securitizationlike trust products and Chinese collateralized loan obligations (CLOs). (The first acknowledged troubled trust product in early 2014, Credit = Gold #1, was exposed to this sector.) It seems the objective is to stop the endless cycle of refinancing loans to troubled enterprises by bringing in strategic investment. China doesn’t just want cash, it wants expertise.

The Notice also discusses the need for capital resources intended for its wealthy East Coast to be redistributed to the underdeveloped northeast, central and western regions.

“We must work to become the kind of target foreign investors want, by leveling the playing field for competition.”

The Notice takes China’s 2008 antimonopoly law a step further by requiring mechanisms be adopted to ensure fairness: carrying out audits, establishing identical, open and transparent performance standards for foreignfunded and domestic enterprises, and strengthening enforcement mechanisms for IP protection, including opening centers for IP arbitration and mediation.

The litany of proposed reforms certainly hits most of the West’s hotbutton issues about unfair dealing in China. But is it just posturing?

I don’t think so, for three reasons. First, the policy pronouncement was not written for foreign readers. It is an official statement in Chinese. It calls out the specific government bureaus responsible for execution. Second, it coincides with President Xi’s speech at Davos, but the backstory is an ongoing debate over whether China is prepared to assume a role of leadership on the global stage. This point is explicitly made in the Notice:

China’s economy is entering into the world economy in a deep way. Our economic development is entering a new stage. In using foreign capital, we are facing a new situation and new responsibilities.

Finally, the outcome of this Notice ultimately will depend on what other options for growth China will have. It will also depend on what other investment options foreign capital has.

-Ann Rutledge, CSC