A Positive Cut
China shortens negative lists to widen market access for foreign investors
U.S. electric carmaker Tesla’s CEO Elon Musk must be a happy man with the company’s second quarter (Q2) performance in China proving his wisdom in choosing the Chinese market.
While production at Tesla’s main U.S. factory was suspended for weeks, work is in full swing at its gigafactory in Shanghai, China’s financial center, and the second phase construction of the gigafactory is about to be completed. Tesla managed to surpass expectations despite the headwinds triggered by the novel coronavirus disease (COVID-19) and on July 2, announced it has delivered 90,650 vehicles in Q2.
Compared to the same period last year, the decline is a mere 4.8 percent, notwithstanding the disruptions. Analysts had predicted it would produce 32,000 to 83,000 cars at the most.
“China appeared to be the star of the show and was a major source of strength in Q2, based on our analysis and industry data,” Dan
Ives, managing director and equity analyst at U.S. investment company Wedbush Securities, said in a note to clients. Ives said the demand out of China for the company’s Model 3, which is made in the Chinese factory, “remains a ray of shining light for Tesla in a dark global macro.”
Tesla’s China story goes back to 2018, when the Chinese Government decided to shorten the negative list for foreign investors that specifies the sectors, fields and businesses closed or restricted to them. The government also lifted the cap on foreign equity for newenergy vehicle (NEV) makers, allowing foreign carmakers to set up wholly owned subsidiaries in China.
Tesla entered the Chinese market, built its first overseas factory there in 2019, and decided to increase its investment to expand the site. Work on that started in January and the expanded factory is expected to begin mass production next year.
“The removal or relaxation of each item on the negative list signifies a wider opening up of the sector, which brings in corresponding foreign capital inflows,” Cui Fan, a professor with the School of International Trade and Economics, University of International Business and Economics in Beijing, told Beijing Review.
To implement its opening-up strategy, China has been pruning its negative lists regularly. On June 24, the updated lists were unveiled by the National Development and Reform Commission and the Ministry of Commerce (MOFCOM), and would come into effect on July 23.
The negative list for pilot free trade zones (FTZS) that enjoy a higher-level opening up has cut items restricting foreign investment to 30 from 37, while for non-ftz areas, the number is 33 from the earlier 40.
Tangible changes
Tesla’s case shows the benefits of China opening up its NEV sector. It has been a boon to foreign investors, domestic competitors as well as global consumers. This year, restrictions have been lifted on another seven sectors.
Finance is one of them. Cui regards 2020 as “the first year of an all-round opening up of the finance sector.”
The foreign equity limit on securities firms, securities investment fund management companies, futures companies and life insurance corporations has been removed, which means wholly foreign-owned financial institutions have been given access to the Chinese market.
Together with the previous policies to scrap quotas on the dollar-denominated qualified foreign institutional investor (QFII) scheme and its yuan-denominated sibling RQFII, foreign investors, who are confident about China’s economy, can seize the opportunity to tap the huge potential.
At the June conference of the Lujiazui Forum, a global platform to foster international financial cooperation, Tim Buckley, Chairman and CEO at U.S. investment agency Vanguard, said in Shanghai that with China’s financial market opening wider, competition will be fiercer. It will mean more professional investors entering the market, which will advance the reform and development of the whole industry.
In the infrastructure sector, the government has canceled the restriction that foreign investors can participate in construction and operation of urban water supply pipeline networks in cities with more than 500,000 people only through joint ventures in which the Chinese partner holds majority shares.
Liu Xiangdong, Deputy Director of the Economic Research Department of China Center for International Economic Exchanges, told Securities Daily that the change will improve the overall quality of urban pipeline network construction with more foreign capital participating in the future.
Infrastructure, he said, paves the way for regional economic development. The opening up of small and medium-sized cities’ infrastructure investment and operation will raise the urban governance standards of these cities and enhance their competitiveness.
The other sectors such as manufacturing, transport and agriculture that have been opened up will also see a sea of opportunities. “With a higher-standard opening up, the legal and institutional guarantees for foreign investment will be increasingly improved,” Bai Ming, Deputy Director of the International Market Research Institute under MOFCOM, said.
Since the revised negative lists come after the implementation of the new Foreign Investment Law, besides opening up more sectors, they are also in tandem with the revised law and regulations.
A special year
As each item on the negative lists is essential to national welfare and people’s livelihood, a lot of prudent consideration is required before they are scrapped. Bai said in the future, reducing the items on the negative lists will become more difficult and thus, “more significant.”
This year, the COVID-19 pandemic made shortening the negative lists more difficult. According to a report released by the United Nations Conference on Trade and Development on June 16, global foreign direct investment is estimated to drop by 40 percent in 2020, hitting the lowest level in 20 years.
“Under such circumstances, whether to close its door a little bit like some countries or to open it wider is a crucial decision for China that requires a precise grasp of both domestic and international situations,” Cui said. “For this reason, the 2020 negative lists are of different significance compared with previous years.”
Li Dawei, a researcher with the Institute of International Economic Research at the Chinese Academy of Macroeconomic Research, told People’s Daily that this year’s negative lists demonstrate China’s commitment to globalization and opening up, which will help build consensus among countries to jointly promote globalization.
Li said shorter negative lists and an optimized business environment will bring in global investors, thereby promoting China’s economic recovery as well as help the firms on the supply chain to resume work and attract investment. The aggregate effect will be to revive global trade and investment and contribute to stabilizing the global industrial chain, ultimately vitalizing the sluggish world economy.
According to Bai, with the pandemic severely affecting the global economy, many foreignfunded enterprises are pinning their hopes on the Chinese market. The shorter negative lists will enhance their confidence in China’s opening up.
As China transforms from the source of cheap labor into a giant market with a huge domestic demand, its foreign investment structure is also undergoing changes. Cui said although some of the foreign capital looking to save labor costs was slowing down in China, more marketoriented and high-level manufacturing-oriented foreign capital is pouring in.
Cui believes in the following years, the negative lists will be further compressed. As the items out of bounds for foreign investors become fewer, the pressure of opening up will strengthen Chinese companies’ international competitiveness and deepen institutional reform so that national governance capacity and government services capability are improved.
This will further optimize the business environment, consolidate the attractiveness and cohesion of China’s ultra-large market, and create Chinese companies that are competitive both at home and in overseas markets.