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China sends constructive signals in trade dispute with US by planning to adopt a new law to protect foreign investment

The roughly 3,000 delegates of the National People's Congress (NPC) will meet on March 5 for their ten-day annual general assembly. The second plenary session of the 13th NPC, China’s highest legislative body, is taking place in what could be a difficult year in the global economic and domestic political arenas: The trade dispute with the US has still not been settled and could yet drive unemployment higher; at the same time, the Chinese government fears that the 70th anniversary of the People's Republic of China could be overshadowed by more problematic anniversaries - like the start of the May Fourth Movement a century ago, the suppression of protests in Tibet 60 years ago, or the Tiananmen protests 30 years ago.

Questions to Katja Drinhausen, research associate at the Mercator Institute for China Studies (MERICS). 

The National People's Congress is expected to adopt a new law designed to better protect foreign companies. What do you think of the planned Foreign Direct Investment Law?

The law would be a clear signal to the US - and also to Europe - that Beijing is taking further steps towards opening its markets to foreign enterprises. The speed at which this project has recently been pursued is clearly a reaction to the trade dispute with the US. But, far from being a purely symbolic gesture, the law should bring substantial improvements in market access, and mark a step towards the equal treatment of foreign and Chinese companies in China. The law would pre-establish national treatment for foreign investments, improve the protection of intellectual property and prevent technology transfer as a prerequisite for investment.

At the same time, the government is defining criteria under which foreign companies can continue to be denied access to certain sectors. There will still be a so-called negative list of areas that remain closed to foreign investors. Beijing also reserves the right to intervene directly where national security interests are concerned. In that spirit, the Foreign Direct Investment Law stipulates the establishment of a security review mechanism to examine foreign investments. In addition, it requires an antitrust review for mergers and acquisitions.

Will these changes give foreign investors more legal predictability and security?

The law will bring more clarity, but it will not offer complete protection against political influence. All laws and regulations will continue to give the Communist Party of China (CCP) a lot of room to manoeuver to maintain control and implement adjustments - albeit not explicitly. To protect itself against accusations from abroad that it acts in arbitrary ways, the CCP increasingly turns to a legal formalization of state intervention. In a recent article on political theory in the party magazine Qiushi, China's state and party leader Xi described the law as "a weapon” in “struggles against foreign countries." It remains to be seen how the security review for foreign investments will be implemented and what it will entail for foreign enterprises. It is crucial that all the details get worked out quickly so that foreign companies do not have to operate under ill-defined processes and responsibilities.

China's economic growth recently dipped to its lowest rate in almost three decades. Xi Jinping recently warned provincial and ministerial officials that China’s economy is facing deep and complex changes. What role will economic problems play in the NPC?

The economic growth rate itself is not the sole yardstick - the Chinese leadership is officially promoting lower growth targets as a key feature of the coordinated transition from a quantitative to a qualitative growth model. More troubling are the trade dispute with the US and the high level of government debt. Should they lead to public-spending cuts, insolvencies, and mass layoffs, protests could follow. As a result, the NPC’s main aim will be to bolster public confidence that the economy will continue to improve. In light of this, the government will emphasize its achievements in the battles against poverty, pollution, and corruption.

What other important legislative proposals will the NPC be dealing with?

The new health-care legislation likely to be adopted at this session will for the first time enshrine the right to basic health-care - requiring the state to establish a functioning system. The NPC’s adoption of the bill could well be accompanied by a fanfare of publicity.  A major campaign is under way to expand the welfare system and to redistribute looming social burdens – such as the effects of China’s aging society – onto many shoulders  for example. Public investments designed to relieve the public’s health-care burdens have recently been given top billing at local people's congresses. For many families, health-care costs currently represent the greatest risk for slipping into poverty. This poses a major risk for Xi Jinping's headline project - to eradicate poverty in China by 2020.

After the campaigns to expel migrant rural residents from China's megacities late last year, policymakers seem to have reached the consensus that new sources of income are needed in the countryside. The planned revision of the Land Management Law will allow villagers to transfer their rights to land usage for a fee - to larger agricultural enterprises, for example. The government plans to promote the founding of small businesses, with a focus on e-commerce and digitization. However, the crucial question of how these ideas can be made to work remains largely unresolved.

The NPC last year abolished the presidential term limit and gave key posts to close confidants of Xi Jinping. How has Xi's position and policymaking developed in the year following the NPC’s constitutional amendment?

The party's hold on the legislative process and the configuration of the judicial system was strengthened. A prime example for this is the CCP Commission for Comprehensive Rule by Law, which, under the leadership of Xi Jinping, monitors all legislative initiatives. The CCP sets the course for legislation, which is implemented by the National People's Congress. At the end of February, the Commission set the legislative agenda for this year. One constructive development is that the CCP is trying to establish a more coherent legal system by bringing into alignment laws enacted by different hierarchies within the Chinese state. The goal is to ensure a greater consistency of legal standards.

What is clear, however, is that the NPC is not the driving force behind the current legislative projects. Its role is more that of a mediator, in the sense that it provides a platform for members of the public and companies to voice their suggestions for improvements to legislative projects.

This interview or excerpts may be quoted with proper attribution. 

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