China pushes through changes to foreign investment law as U.S. trade talks start
U.S. Trade Representative Robert E. Lighthizer led a Trump administration team that included Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross, while Chinese Vice Premier Liu He headed the delegation from Beijing.
As talks in the Eisenhower Executive Office Building got underway, the two sides confronted a long list of divisive issues. The Trump administration is demanding structural changes in China’s economic model along with a major reduction in its $375 billion annual deficit on China trade.
Chinese officials have offered to buy substantially greater amounts of American soybeans and liquefied natural gas but are resisting calls to shrink the state’s role in the economy.
“I’m not an optimist about getting the big deal,” said Michael Pillsbury, a China expert at the Hudson Institute and frequent White House adviser.
Leading up to the meeting in Washington, China accelerated plans to introduce a new foreign investment law that will tackle some of the key sources of friction with the United States by banning forced technology transfers and better protecting intellectual property rights.
The National People’s Congress, China’s rubber-stamp parliament, will vote on the new foreign investment law, which will replace three existing laws, during a session scheduled to open on March 5, the official Xinhua news agency reported Wednesday. It is sure to be approved.
“There is an urgent need for such a unified law to provide stronger legal protection for further expanding, opening up and better using foreign investment,” Justice Minister Fu Zhenghua told lawmakers when introducing the draft during a special two-day session of the Congress’s standing committee this week.
The speed with which China is enacting the law — Beijing will do in three months what usually takes at least a year — underscores President Xi Jinping’s eagerness to reach a deal.
Xi appears to be concerned that the trade war will exacerbate an economic slowdown that is already underway, analysts say.
But based on the most recently publicly available text, the law may fall short of what is needed to defuse the Trump administration’s concerns, according to some U.S. experts.
“It actually would be a step backward,” said Scott Kennedy, director of the project on Chinese business at the Center for Strategic and International Studies. “The draft is so full of vague statements and holes that passing the law would make absolutely no difference to the experience of foreign companies in China and actually could leave them worse off than they are today.”
A draft dated Dec. 26 exempted the financial sector from its requirements, sets no deadline for China to treat foreign companies the same as domestic ones and includes a national security clause that the government “could use to block all sorts of investment,” Kennedy added.
That draft also is much shorter and less detailed than an abortive 2015 proposal to overhaul China’s foreign investment system, according to a blog post by three attorneys at Covington & Burling.
As a result, many significant issues will be worked out in regulations drafted to implement the law, creating “significant uncertainty” about how the measure will work in practice, according to Covington.
Provisions ostensibly aimed at satisfying the United States — including over the forced transfer of technology by foreign companies to their joint venture partners — “do not appear to conclusively address those long-standing concerns,” the attorneys wrote.
The standing committee is reviewing an updated version of the legislation, according to the Xinhua news agency. But that text has not yet been made public, leaving foreign investors uncertain of the extent of the changes made since the end of December.
Trump has set a deadline of March 1 for the negotiators to reach a deal on rebalancing the countries’ trade relationship or face the risk he will further increase tariffs on Chinese imports.
As of October, almost 950,000 foreign-funded companies were registered to operate in China, and they had invested more than $2.1 trillion in China, the state news agency said.
The new law will help China attract more foreign investment and protect foreign investors’ rights and interests, Xinhua reported.
The law would strengthen intellectual property protections for foreign companies investing in China. The draft measure says that the state will “generally not” expropriate foreign investments. But lawyers noted that it says expropriation could be justified for vaguely worded “social and public interests.”
It also states that the standard practice of forcing foreign companies to make their technology available to Chinese partners would now be prohibited, and that instead China would encourage “technological cooperation” on a voluntary basis that could be negotiated.
It also creates a more level playing field in which foreign and domestic companies would be treated equally in the eyes of the law, and allows foreign businesses in China to freely repatriate their profits.
These are the kinds of structural changes that the United States and other capitalist democracies have been pushing for — a way to create a more equitable system rather than allowing Chinese companies to have preferential treatment and state subsidies.
Yao Xinchao, a professor at the University of International Business and Economics in Beijing, said China is making the kinds of fundamental changes that are needed.
“China’s reforms always happen under external pressures, mainly from the U.S.,” he said. “China will make concessions but won’t do everything at one go, and some issues, like the business environment, just can’t be changed in a short period of time.”
Other Chinese commentators used the development to contend that the Chinese government was showing its sincerity in the trade talks — in contrast to the United States, where two federal indictments were filed this week against Huawei Technologies, two affiliates and its chief financial officer, alleging bank and wire fraud.
“Beijing has shown its determination to pursue reforms that will further open up the economy, despite the tough challenges that lie ahead,” business columnist Hu Weijia wrote in the nationalist Global Times. “The U.S. and its allies need to offer the same sincerity to China in return and open their domestic markets, especially in the 5G industry.”
Huawei has been vying to build fifth-generation high-speed cellular networks around the world and become the global leader in the new technology, but Western governments, led by the United States, have concerns about security.
Fifield reported from Beijing.