China Shifts Foreign-Investment Focus Go back »

2012-01-13 | All chapters

China shifts foreign-investments focus
Wall Street Journal, 31st December 2011

China has reshuffled a list of key sectors where it wants to attract foreign investment, downgrading traditional industries like autos and putting more emphasis in emerging fields such as new energy sources.

The changes reflect a broader shift in the country's economic strategy, as leaders seek to shift away from a dependence on heavy manufacturing and toward higher-tech and more environmentally friendly industries.

The National Development and Reform Commission, China's top economic planning agency, publishes a "foreign investment catalogue" every few years that divides investment into broad categories: encouraged, allowed, and restricted. On Thursday it unveiled its latest catalog, which replaces the last one in 2007.

 The catalog reflects broad guidelines to be followed by other state agencies. Specific policies to encourage foreign investment, such as preferential tax structures or streamlined approval processes, are in the hands of various government agencies and local governments.

Foreign investment in auto making will move from being encouraged to merely being permitted, due to potential overcapacity and "blind investment" in the sector, the NDRC said in a statement. A report by the state-run Xinhua news agency also cited the need to support domestic auto manufacturers.

Dirk Moens, secretary general of the European Union Chamber of Commerce in China, said the new guidelines reflect the maturing of Chinese car manufacturing over the past decade and might limit new entry into the market. "But it should allow sound operating conditions for those already in the market," he said.

A number of global auto makers—Fiat SpA, Renault SA and Subaru, among others—are trying to break into China but could find those plans hampered by the new national strategy, said John Hoffecker, managing director at AlixPartners.

China has surpassed the U.S. to become the largest auto market in the world and a major profit center for global auto makers, although they are still required to operate in joint ventures with Chinese companies, holding maximum stakes of 50%.

Major U.S. car makers predicted that the change would have little impact on their business in China.

General Motors Co., calling itself a "key pillar of the Chinese auto industry," said it expects the new guidelines to have "minimal negative impact on GM's future plans in China."

"This change does not impact Ford's existing investments in China," Ford Motor Co. said in its own statement. "Ford remains strongly committed to the Chinese market, which will drive a large part of Ford's growth globally within this decade and beyond."

Slowing auto sales growth in China, to about 3% in 2011, from about 32% in 2010, has particularly affected local auto brands, and this has driven authorities to direct more support to domestic auto makers, said Namrita Chow, senior analyst at IHS Automotive.

"We're expecting that there will be more laws that come in to facilitate greater technical know-how flow toward Chinese companies," she said.

At the same time, areas such as alternative-energy cars, electrical machinery, Internet equipment and some service industries are being moved into the encouraged category.

New methods to extract fossil fuels will also receive more favorable treatment. Foreign investors will be allowed to form joint ventures with Chinese companies for the exploration and development of shale oil, oil sands, heavy oil, shale gas and seabed gas hydrate. Previously, foreign companies were allowed only to cooperate with domestic companies in these areas.

The U.S. Energy Information Administration estimates that China has more natural gas in shale formations than the U.S., but experts say China won't be able to replicate the American energy boom without foreign companies' expertise and capital.

A key question is whether China is seeking simply to acquire technology from foreign firms or will open energy development to U.S. companies.

"If Western firms are allowed to participate in a material way, this would certainly have a very positive impact on their gas growth potential," said Neil Beveridge, a senior analyst at Sanford C. Bernstein, noting that Exxon Mobil Corp. and Chevron Corp. have been in discussions with Chinese companies about forming joint ventures.

Support for investment in Internet equipment in part reflects the fact that China's young people "are really highly addicted" to Web-based activities, including online gaming and micro-blogging services, said Handel Jones, chief executive of the consulting firm International Business Strategies Inc., and author of the book "Chinamerica" about U.S.-China relations.

But the situation raises tough issues for U.S. technology companies, Mr. Jones said. For one thing, Chinese officials will favor products that can be used to help monitor citizens' activities and control their communications, such as smart cards, he said. At the same time, China is trying to favor home-grown technology suppliers wherever possible.

Indeed, even in areas where investment is to be encouraged, many restrictions remain. For instance, the new catalog limits foreign ownership in electric car-battery production to 50%, meaning investors will still have to partner with local companies.

In a draft version of the catalog submitted to the public for comments in April, this 50% limit applied to all parts for new-energy vehicles, but the European Chamber of Commerce, among others, lobbied Beijing to loosen the restrictions.

"I'm happy to see that change," said Mr. Moens. "I would be even more happy to see the restriction on batteries also gone."