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China: Corporate Investment

Foreign Investment Regime

This page was last updated on 26 July 2019.

Since 2004, foreign investment into China has been freed of its restrictions and has burgeoned. Then, partly in response to a perceived need to be more encouraging, and partly in order to gain admission to the World Trade Organization, China gradually began to loosen up. By now, most sectors are fully open, and there are few remaining restrictions.

China's WTO membership has certainly made for fundamental changes in the country's degree of engagement with other parts of the world. China has frequently resorted to the WTO's dispute mechanism, as have its trading partners, often with an outcome not in China's favour. In December, 2009, for instance, the WTO's Appellate Body confirmed that China's restrictions on the importation and distribution of certain copyright-intensive products, including films for theatrical release, DVDs, music, books and journals, are inconsistent with China's WTO obligations.

The ruling was the result of a dispute procedure initiated by the USA in April 2007, in which Washington sought to address three significant market access concerns.

First, the US accused China of prohibiting foreign enterprises and individuals from importing reading materials, audio-visual home entertainment products such as DVDs, music and other sound recordings, and films for theatrical release. The WTO panel report found that China's key importation restrictions on these products were inconsistent with its obligations under its WTO Accession Protocol. The panel also found that China's restrictions were not justified by the exception in the General Agreement on Tariffs and Trade (GATT) 1994 related to the protection of public morals.

Secondly, China prohibits foreign enterprises from distributing certain reading materials and from distributing music electronically. The US also believed that China imposes discriminatory operating requirements on foreign-invested distributors of reading materials and DVDs. The WTO panel report found that these prohibitions and discriminatory operating requirements were inconsistent with China's obligations under the General Agreement on Trade in Services.

Thirdly, the US complained that certain imported products face more burdensome requirements before they may be distributed in China than domestic products. The panel found that because of these requirements, China discriminates against imported reading materials in several significant ways in breach of the national treatment obligation in the GATT 1994.

The Appellate Body report, published on 21 December called on China to eliminate the discriminatory treatment that US distributors of certain products face – such as discriminatory operating term and capital requirements – as well as to allow US companies to partner with Chinese enterprises in joint ventures to distribute music and other sound recordings over the internet.

"This case is also an important part of our efforts to combat intellectual property piracy," Kirk noted. "The panel and Appellate Body findings ensure that legitimate American products are granted market access so that they can get to market and beat out the pirates. This finding helps to ensure that America's creative ingenuity and innovation are protected abroad."

Chinese news agency Xinhua reported that China's Ministry of Commerce "expressed regret" over the loss of the appeal against the WTO ruling. According to the report, ministry spokesman Yao Jian said in an online statement that the characteristics of cultural products determined that they should be managed differently to other imports.

It is not always true, though, that legal pressure is necessary to compel China to open itself to international trade. In April, 2010, Western firms were able to welcome a decision by Beijing to ease procurement rules that effectively prevent foreign firms from supplying the Chinese government with computers and other technological equipment.

The procurement rules, known as China's 'indigenous innovation' policy, were drawn up in 2009, and required companies to obtain patents, trademarks and other intellectual property in China before any other country. However, in a draft of the new rules released for public comment on 12 April the Chinese government appeared to have relaxed these requirements so that companies which have legal rights over the intellectual property of the products may qualify to take part in the procurement process.

The European Chamber of Commerce in China said that the rule change represents "an important sign that policymakers in China recognize the role that fair competition plays in developing and enhancing China's high-tech capabilities," although it remains to be seen how the new rules work in practice.

Concerns remain over China's general stance towards the rest of the world, and in July, 2010, Chinese Premier Wen Jiabao reassured foreign investors of the stability of the country’s investment climate, countering fears that China’s economic environment is worsening.

Wen issued the reassurance at a meeting with Germany’s Chancellor Angela Merkel and a group of business leaders from China and Germany and added that his country would not block the export of rare metals needed in the manufacture of computers and mobile phones.

Wen countered an allegation that China’s investment environment had deteriorated by saying “I think it is untrue”. Senior executives from some of Germany’s biggest companies were present at the meeting, including Siemens and BASF, the chemical giant.

The business leaders called on the Chinese government to handle foreign investment with fairness and equity, though the value of trade deals between China and Germany already exceeds USD100bn, with foreign investments up by USD12.5bn in the last year.

Speaking to reassure foreign investors, the Premier said: “Those that have entered China all enjoy national treatment, as do Chinese companies, whether they are a foreign-funded company, a joint venture or a joint stock company”.
The meeting was seen as important as China is the world’s biggest exporter of rare earth minerals and is the EU’s largest trading partner.



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