Thomas P.M. Barnett :: Weblog

ARTICLE: "In Strategic Shift, China Hits Foreign Investors With New Curbs," by Andrew Batson and Mei Fong, Wall Street Journal, 30 August 2006, p. A1.

The world has been waiting for a while to hear what China's first comprehensive policy on foreign direct investment would be. For years now, the restrictions have been reasonably few. Basically, if you had money they'd take it, and you could--in effect--thusly rent local Chinese labor for manufacturing and assembly of goods destined almost exclusively for export.

Now, that will change. China signaled this change in the auto industry last spring:

In automobile production, for instance, a business long dominated by foreign companies operating through joint ventures, the government said in March that it won't approve any new expansion of capacity unless companies meet requirements, as yet unspecified, to make local brands and support domestic product development.

In short, the fabled Chinese internal market is arriving and guess what? China itself plans on dominating it--and FDI will be shaped to that end.

Is China closing its economy to foreign money? Hardly. Simply couldn't afford it. You stop the FDI flow and the economy will grind to a halt.

But growing the economy primarily for export and resulting bank reserves stops making sense after a while, especially when you're ramping up both your urban population (the most profound migration toward cities in human history--all in China alone!) and watching the percent of that urban population skyrocket from about 15% middle class today to as much as 85% by 2025. All those people will want stuff, and China aims to use that historic opportunity to make sure its brands predominate in its markets.

And so FDI regs will be shaped to that end.

As the article points out: this is not some wave of anti-foreigner sentiment brewing. Anything but. Rather, it reflects the growing concern among the elites for rural poverty and related unrest--that huge inland Gap within China.

The focus here, according to the article, will be on retail outlets and restricting the ability of foreign giants like Wal-Mart and Citicorp to dominate what will inevitably become huge service sector elements of China's future economy.

And if that strikes you as odd, remember how freaked we got over the Chinese trying to buy one "American" oil company whose business at that point was already 80% Asian.

Some good stuff here:

China these days lets foreign businesses compete in its domestic markets to an extent that few if any developing countries have matched. Roughly 280,000 companies backed by foreign investors operate in China, doing everything from delivering packages to building cars and selling toothpaste.

China has been the world's biggest target of FDI for several years now--at roughly $60B. This flow is naturally peaking, and probably will become a lot more specifically focused on utilities/infrastructure development and mass consumer items, with both sectors focusing internally rather than on export.

Of course, taken beyond reason, these new restrictions could signal a truly negative trend, sending impatient investors elsewhere (hello India!), so clearly a balancing act is in order whereby the regime signals both a deference to internal development (all those hundreds of millions still living on damn near nothing) and being friendly enough to further liberalization and economic reforms so foreign money still prefers China over other possibilities.

But the underlying reality is a clear one--and it's positive. A lot of this new push for restrictions comes from domestic companies that are getting more sophisticated in protecting themselves. Problem is, there are also a lot of bad state-run enterprises that need both cash and prodding to clean up their acts, and they too can hide behind such growing protectionism.

But again, expecting China to continue letting foreign companies basically dominate its total exports is a bit unrealistic. Last year China exported $750 billion and foreign companies controlled 450B of that--60 percent. Again, remember how we freak out over such "foreign ownership" stuff and realize that no emerging country is going to continue down that pathway ad infinitum.

So this is yet another sign that Hu and Wen are serious in their broad goals of making China's growth more sustainable, domestically-focused and less resource intensive--as this piece points out. They want more mature economic development, making sure "that Chinese companies have the trappings of 21st-century businesses, from a storehouse of patents and trademarks to recognizable brand names."

A good example is China's new regs about no foreign takeovers that harm national security. Guess who taught 'em that one?

Yes, many will lament these changes as curtailing the imagined inexhaustible pool of cheap Chinese labor, but the upshot for me is: China continues to make its internal rule sets look more like ours--and the emerging global rule set. Moreover, these changes are a sign of a maturing situation.

So I better use my "Deadwood" analogy on Chinese capitalism while I can, because like so many other images relating to China's rapid run through history, this one has a surprisingly limited shelf-life.