Can China win back European business with its 24 promises?

This article was originally published in Italian in Panorama on 30th Nov 2023.

Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at:

After the unprecedented stall to global trade and investment caused by the Covid-19 pandemic, the promise of a strong economic rebound following China’s re-opening brought hope to the otherwise gloomy global outlook. However, the supposedly unstoppable pace of China’s economic growth seems to have met its limit. The rebound is yet come to fruition, leaving European businesses who are already reeling from the past three years of uncertainty, wary about increasing their investment into China.

Chinese leaders, worried about the declining economy, have been on a charm offensive to appeal to foreign investors. With indicators of foreign direct investment (FDI) slumping to their lowest in 25 years in the second quarter of 2023[1], there has been a flurry of public commitments from Chinese officials to improve the foreign investment environment.

In a bid to boost investor confidence and reverse the scepticism of international business in China, Beijing’s leadership has recently released the Opinions of the State Council on Further Optimising the Foreign Investment Environment and Enhancing Attraction of Foreign Investment. China’s State Council’s 24-point policy framework outlines measures to enhance the business environment and attract foreign direct investment (FDI) by alleviating concerns of international businesses and implementing strategies for a more efficient utilisation of foreign investment.

The 24 points: What does it mean?

The 24 points emphasise comprehensive measures to promote and safeguard foreign investment in China, covering the major elements of enhancing foreign investment. Section one outlines measures to improve the foreign business environment; points 6-8 focus on ensuring equal treatment for foreign-invested enterprises; points 9-12 address protection mechanisms; 13-16 aim for investment convenience; points 17-20 discuss financial and tax support, while points 21-24 focus on improved promotion methods. The final section stresses the importance of implementation, requiring all government departments to optimise the investment environment to boost attraction efforts.

Beijing has good reason to want to address these issues. Over the past decade, European and other foreign companies have found it increasingly difficult to conduct profitable business operations inside the Asian giant. The 2023 Business Confidence survey of the European Chamber of Commerce found that a significant share of EU companies have started reviewing their investment and operational strategies in China. European business also reported decreasing revenues and profits, and a record 64% of respondents reported that doing business in China became more difficult. Most importantly for China’s leadership, as a result, only 55% of respondents rank the Chinese market as one of their top-three destination for future investments and more than half have no plans to expand their operations in the country. [2]

However, foreign businesses organisations, starting with the European Union Chamber of Commerce in China, remain unsure about the effect the 24 points will actually have on the business environment. Although exacerbated by the government’s strict measures during the pandemic, the main complaints of foreign businesses in China are generally long-standing, and it is not the first time Beijing has signalled its intention to address them.

Foreign Investment Law (FIL): EU businesses growing accustomed to false promises

On 1st January 2020, the Foreign Investment Law (FIL) was implemented, bringing with it the promise of long-awaited changes to China’s foreign investment legal framework. The new legislation promised to further open China’s investment market for foreign players while creating a more level playing field to stimulate investment into the country. However, three years after its implementation, and in spite of these promises, widespread regulatory and market access barriers continue to undermine the efforts of European companies operating in China. 

The FIL specifies that foreign businesses can participate in government procurement activities through fair competition and that products produced and services provided in China would be equally treated in government procurement, regardless of the origin of the company.

The reality is a different story: discrimination against foreign enterprises in public procurement continues to be a key challenge. ‘Made in China’ requirements in local public tenders are pushing foreign companies into joint ventures in exchange for market access. In the European Chamber’s Business Confidence Survey 2023, 17% said they were still compelled to transfer technology, despite the FIL prohibition of this exact practice.

In the medical devices industry, China’s staunch protectionism of domestic firms during the Covid-19 pandemic, through benefits such as the provision of financial support and tax incentives, have meant large disadvantages European companies. For legal services, restrictions on foreign law firms and lawyers China significantly limit access for both Chinese and foreign companies to high-level legal advice needed in complex cross-border investments. In the ICT sector, European companies have been excluded from new opportunities in the market like 5G due to ‘national security’ reasons. Complex and poorly-defined requirements for localising data, data security and cybersecurity are also major concerns for European companies, beyond just the ICT sector. industry.

The continued discrimination against foreign businesses and the absence of any clear implementation guidelines means that the FIL is just one more example of the unfulfilled promises and unpredictability that European businesses have grown accustomed to in China. If the 24 points do in fact address this issue, this would signify a new age of fairer competition between foreign and Chinese companies. 

A more competitive market

China’s prioritisation of its own is directly impacting its economy. The International Monetary Fund’s (IMF’s) identified the prioritisation of the public sector as a key factor weakening China’s productivity growth. As state-owned enterprises (SOEs) tend to be less productive than their privately-owned counterparts, their continued prioritisation is impacting the country’s productivity and competitiveness, perhaps even increasing the productivity gap between China and advanced economies.

If China is serious about recovering its economy and opening-up to the world, it needs to address the balance between state-owned and private sectors. Currently, certain industries are only fully open to SOEs, giving them the advantage in many areas of business and in direct detriment to the private sector, especially small and medium-sized enterprises (SMEs).

National security vs open to business

The promises and pro-business signals are juxtaposed against a backdrop of the expansion of China’s national-security focused legislation. An emerging trend in China’s since the end of the pandemic has been a reinforced focus on self-reliance and national security even if it impacts productivity growth.

The securitisation of economic ties with the outside world has already been translated into significant pieces of legislation, namely the recent amendments to the Anti-espionage Law and the new Foreign Relations Law. Both reforms include references to a broader perception of what constitutes “national security concerns” without providing guidelines on what is a breach or a threat to such concerns, once again causing great uncertainty among international investors in China. Under these circumstances, pro-business rhetoric like the 24 points are understandably regarded with caution by the still wary international business community.

Tangible actions are needed for foreign businesses reduce the risk of the 24 points becoming the catalyst of business’ ‘promise fatigue’ as a result of China’s unfulfilled market opening rhetoric. Recent developments like the extension of China’s Individual Income Tax (IIT) non-taxable allowances for foreign employees point towards the possibility that the needed clarifications and guidelines could materialise. However, bridging the gap between policy and concrete action is still a challenge. It demands significant market reforms as well as continued improvement in the relationship between public authorities and private enterprises.

China’s fragile balancing act between increasing foreign investor confidence versus national security is not going unnoticed.  In this context, businesses have no option but to wait and see if China can translate its pro-business commitments into real-world results that genuinely foster a more transparent and favourable climate for foreign investors. 


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[1] China's State Administration of Foreign Exchange

[2] European Chamber Business Confidence Survey 2023