Tuesday, 24 February 2015

Ken Davies' article on China's new investment rules (Nikkei Asian Review)

February 20, 2015 7:00 pm JST
Ken Davies

China's new investment rules: A step forward, but more is needed

The Chinese authorities are at long last starting to simplify the law on foreign investment in line with recommendations from trading partners and international organizations like the World Bank, the United Nations and the Organization for Economic Cooperation and Development. While this is a step forward, it does not yet provide a completely open and nondiscriminatory environment for foreign investors.
     The Ministry of Commerce, in charge of framing and implementing policies on both inward and outward investments, published a draft Foreign Investment Law on Jan. 19. This followed over a year of public consultation and there was a short window of opportunity -- until Feb. 17 -- for comments to be submitted before the law is finalized.
     This process continues the trend of increasing transparency in the formulation of economic laws that started with the 2007 Labor Contract Law.
Much needed simplicity
The new law is designed to replace the unnecessarily complex series of laws that apply to different categories of enterprises: the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Wholly Foreign-Owned Enterprises. Discriminating between these types of enterprises makes even less sense than treating foreign investors differently to domestic investors.
     In the three OECD reports on China's policies towards foreign investment published in 2003, 2006 and 2008, I recommended that China replaced all three laws and its Catalogs for Guiding Foreign-Invested Industries with one simple, closed list. There was muted response from Beijing at the time, but it now looks like the suggestion was taken seriously.
     At present, all industries are split into four confusing catalogs based on whether foreign investment is permitted, encouraged, restricted or prohibited.
     The largest catalog is that of permitted industries. This is too long a list and changes frequently to accommodate new technologies and products, so it is the one catalog that is not published.
     The prohibited catalog contains items that other countries routinely put in their closed lists and also industries that are anyway illegal in China. But it also includes industries where a foreign ban makes no sense, such as the processing of green tea.
     There is a restricted catalog in which the authorities place, inter alia, services sectors which had to be opened after China joined the World Trade Organization in 2001, and an encouraged catalog of sectors to which the government wishes to attract investment. As with investment in poorer regions, this is largely done through nondiscriminatory incentives available equally to domestic firms, in line with good international practice.
     In the new law, the catalogs will be replaced by a negative list which includes both industries where foreign investment is banned outright and those which have thresholds of restricted investments above which Ministry of Commerce approval will be required.
     The negative list appears to give the Ministry of Commerce more control over approvals than it has under the catalog regime, which is really a hodgepodge of restrictions dictated by various ministries and other bodies. Indonesia did something similar in 2010, and its experience has shown that such a negative list is easier to liberalize.
     Under the new law, China would therefore grant foreign companies the same treatment as local ones apart from the sectors on the negative list, something which a few years ago was being loudly rejected by the Ministry of Commerce and which would take China into a new era of international investment diplomacy.
Why is China doing this? And why now?
The three earlier laws were drawn up hastily in the 1980s and 1990s to ensure that foreign investment would not threaten the existing economic system.
     By the turn of the century, China had become the largest developing-country recipient of foreign investment and these laws had become redundant since the economy had become a lot more open.
     Lawmakers had also gained a wealth of experience, having scoured the world for precedents in building a basic legal framework for businesses and the economy.
     Since 2000, while China has continued to attract large quantities of foreign investment, it has developed rapidly to become one of the largest sources of investment to the rest of the world.
     This has totally changed the outlook of the country's leadership. Whereas China for decades saw foreign investment as something to be welcomed but carefully restricted and controlled, it now sees foreign investment through the eyes of an investor. After all, it has now encountered the same problems that foreign investors have experienced in China. A clear sign of this change of attitude is China's readiness to pursue a bilateral investment treaty with the U.S.
     The replacement of the catalogs by a "negative list" was initially proposed for the Shanghai Pilot Free Trade Zone. But in over a year since the zone was established, this has not really succeeded in attracting large quantities of liberalized foreign investment. In any case, it makes more sense to make the change at the national level rather than play around with a quite unnecessary pilot scheme.
     To the extent that the new law will reduce formalities for foreign investors in China, it is a welcome development. But much more needs to be done. The negative list will become a target for China's trading partners, who will continue to insist that it is reduced to an essential minimum and that the authorities publish an explanation of the reason for each prohibition. It is also uncertain just how far the newly defined "foreign investors" (previously "foreign-invested enterprises") will receive national treatment. Nor is it clear whether national security and monopoly reviews of foreign investments, which have been used in recent years to protect domestic enterprises from competition, will become fairer and more transparent.
     Most of all, there is still much to be done to guarantee the rule of law and the unbiased functioning of the courts.
Ken Davies is president of Growing Capacity, a consultancy promoting investment for development. He was previously the chief Asia economist at the Economist Intelligence Unit in Hong Kong and head of global relations in the investment division of the OECD in Paris.

Saturday, 4 October 2014

Hong Kong: A Time to Talk

The students and Occupy Central have made their point in a self-disciplined and dignified way, spreading their message of democracy far beyond Central. It is now time for them to clean up the occupation sites, go home and resume talks with the government.

Thursday, 2 October 2014

Hong Kong: power to the people - but peacefully, please

I can not keep quiet about this situation.

The tear gas attacks on peaceful demonstrators last Sunday were outrageous. Since then, I have attended the occupation stretching from Admiralty to Central and taken some photographs, all of which are on my Facebook timeline which you can see by clicking here. I am adding to these pictures every day, so please come back often to see how things are developing.

I have spoken to demonstrators and of course I have been reading and listening for many months and years. I have also written some articles (like the one below) attempting to promote peaceful dialogue.

The demonstrations, and the demonstrators, are admirable. The numbers involved are far higher than the trivial estimates in the local and international media. I can not count so many people, but I have seen many crowds of this kind, both in Hong Kong and in other parts of the world, and this is now far beyond the tens of thousands. Yet the self-discipline is better than in most of the other demonstrations I have witnessed elsewhere. The youngsters (as striking students have clearly taken over from supposedly more mature democracy activists) are keeping the occupied area clean, they have brought their homework with them, the slogans are moderate ("Go on, Hong Kong!", "Genuine universal suffrage"), and the atmosphere is so relaxed that slogan posters have appeared saying that this is not a carnival but a political protest.

Friday, 25 July 2014

Bridging the gap with calm dialogue

[Article by Ken Davies in China Daily Hong Kong Edition on 25 July 2014]

Opinion on how to nominate the next Chief Executive (CE) candidates of the Hong Kong SAR in 2017 is deeply divided, with much name-calling and emotion clouding the issue. What is now needed is calm dialogue to find common ground so a consensus can develop around a workable, broadly acceptable solution.

The "pan-democrats" can not ignore Hong Kong's geopolitical location. The SAR is indisputably a part of China. The Basic Law stipulates that the method of selecting the CE must be reported for approval to the Standing Committee of the National People's Congress after endorsement by a two-thirds majority of Hong Kong's Legislative Council and the consent of the current CE. So central government leaders have to be happy with whatever arrangement is produced, or it won't happen.
Bridging the gap with calm dialogue
At the same time, those leaders can not ignore a poll (even if they view it as being illegal and invalid) in which over a fifth of registered voters showed their wish for public nomination of candidates. More fundamentally, the fears of a significant proportion of the population of an erosion of freedom and the rule of law need to be honestly addressed -- not brushed aside.

If this chasm is not bridged, there will be an increased risk of instability. There is ample scope for the "Occupy Central" movement, and maybe other groups, to engage in protests whose outcome is not easy to predict with certainty. So far, the police have shown decency and restraint, but they might find this difficult to maintain should demonstrations escalate and they face increased pressure to contain disruption.

Wednesday, 11 June 2014

Chinese government White Paper on Hong Kong

Here is the full text of the White Paper on Hong Kong issued by China's State Council on June 10th, 2014: 

The Practice of the "One Country, Two Systems" Policy in the Hong Kong Special Administrative Region
Photo © Ken Davies 2013.
  • Foreword
  • I. Hong Kong's Smooth Return to China
  • II. Establishment of the Special Administrative Region System in Hong Kong
  • III. Comprehensive Progress Made in Various Undertakings in the HKSAR
  • IV. Efforts Made by the Central Government to Ensure the Prosperity and Development of the HKSAR
  • V. Fully and Accurately Understanding and Implementing the Policy of "One Country, Two Systems"
  • Conclusion

Wednesday, 11 December 2013

Road map for financial reform by Zhou Xiaochuan

This article is the first part of an excerpted translation from Chinese of a speech by Zhou Xiaochuan, Governor of the People's Bank of China, China's central bank, published in China Daily on December 11, 2013.

In a move to push for improving China's modern market system, the Third Plenary Session of the 18th Central Committee of the Communist Party of China has drawn up a road map for comprehensive and deepened reforms.
As the core of a modern economy, the financial sector is at the heart of China's socialist market system. To do a better job in the financial sector in the future, the country should firmly hold on to the essential principle that the financial sector should serve the real economy, adhere to the reform direction that the market dominates the distribution of financial resources, and stick to a development concept that prioritizes coordination between innovation and oversight.
In line with the plenum's mapped program, we need to comprehensively push for reforms, opening-up and development, and accelerate the establishment of a safe, sound and modern financial market system with a broader range of services, a reasonable structure and greater efficiency.

Wednesday, 4 December 2013

Waste management policy will take time

Article by Ken Davies in China Daily, Hong Kong edition on December 4, 2013

Editor's note: This is the first of a series of articles exploring policies to address Hong Kong's waste management challenges.

People in Hong Kong are impatient with the government’s policy on waste management.

This, as Christine Loh, Under Secretary for the Environment recently explained to me, is because they expect everything to happen at once, while the various initiatives taken by the government will take time to implement.

Transforming life through music in Hong Kong

Article by Ken Davies in China Daily, Hong Kong edition on November 22, 2013

The Greeks were right — children need to be educated in music so they can learn to live in harmony with others. This principle is starting to be applied here in Hong Kong.

Sunday, 17 November 2013

CCPCC Reform Decision

The Decision on Major Issues Concerning Comprehensively Deepening Reforms was adopted at the close of the Third Plenary Session of the 18th CPC Central Committee on Tuesday 12 November 2013. The following is an abridged version of the full text of the document as published in China Daily on Saturday 16 November 2013:

Friday, 15 November 2013

3rd Plenum Communiqué 中国共产党第十八届中央委员会第三次全体会议公报 (English/中文)

(Passed at the 3rd Plenum of the 18th Congress of the Chinese Communist Party on 12 November 2013)
The 3rd Plenary Meeting of the 18th Congress of the Chinese Communist Party was held in Beijing from 9 to 12 November.
This Plenary Meeting was attended by 204 Central Committee members and 169 alternate Central Committee members. The Central Discipline Inspection Committee Standing Committee members and responsible comrades from relevant sides attended the meeting as non-voting delegates. A number of grass-roots comrades and expert scholars from among the representatives at the 18th Party Congress also attended as non-voting delegates.

Wednesday, 13 November 2013

Hong Kong should join the OECD

Article in China Daily, Hong Kong Edition on November 11, 2013 by Ken Davies.

Hong Kong can benefit from joining the Organisation for Economic Co-operation and Development (OECD), the world’s leading forum for sharing experience on all areas of policy apart from defense and national security.

Thursday, 19 September 2013

Distorted view of China overlooks its many positive achievements

by Chandran Nair

[This article appeared in the South China Morning Post on September 11, 2013.]

The cover of a recent issue of The Economist featured a Chinese dragon encircling the globe, covering it in smoke and flame. The title read "The world's worst polluter." It was a bold cover typical of The Economist, but it betrayed deep-rooted ideological biases and did its readers a great disservice.
It was, in too many ways, what has become the quintessential "China story" - one that emphasises the nation's huge and growing impact on the world but chooses only to highlight its negative aspects - from environmental and foreign policy issues to investment in Africa, it would seem Beijing can't do anything right.

Friday, 13 September 2013

China Outlook

I am now writing short articles on the Chinese economy for China Outlook, a new forward-looking magazine focusing on China. There is no byline for any article.

The lead story all this week has been on China's banks: Dysfunctional banking system fails the innovators.

The new lead story from today is: China's slowdown is structural, not cyclical.

Future articles will cover such topics as the rebalancing of China's economy and productivity growth in China.

China Outlook is here.

Saturday, 7 September 2013

China's Economy: No Hard Landing

余永定:中国金融存在脆弱性 应加强短期跨境资本管理

中新社北京9月5日电 (记者 陈康亮)中国社科院世界经济研究所所长余永定5日在京表示,中国目前的金融体系存在一定的脆弱性,应加强短期跨境资本管理。


Five years of the 2008 Labor Contract Law

The World Bank has published a report on the implementation of China's Labor Contract Law, which came into force on January 1, 2008 after unprecedented public consultation that sparked a lively debate in which employers sought to weaken the law.

The report indicates general satisfaction with the way the law has been put into practice. Survey results show that nearly half of workers in the sample were happy with it, though an almost equally large number felt only  "so so". Over 90% of employers felt the implementation of the law was "strict" or "very strict". Differences in perceptions between urban resident and migrant workers were smaller than expected.

The complete report is available for download here.

Sunday, 18 August 2013



Sunday, 30 June 2013

China's rich travelers

It is no longer surprising that there are a lot of rich people in China. There are now 8,100 CNY billionaires in the country, 600 more than in 2012, including 2,700 identified by Hurun Research Institute, the key research institute that documents the wealth and spending habit's of China's richest. Hurun estimates that 5,400 have been missed, i.e. they represent "hidden" wealth. There are 600 individuals with USD1 billion or more in assets, 263 of them identified and 340 "hidden".

This is the background to Hurun's June 2013 report on The Chinese Luxury Traveler, summarized and linked below. What does this wealth of information mean for China and for the rest of the world? I try to answer these questions, briefly. You are welcome to add your comments and experiences.