Administrative
Rationalization: The study recommends that China address inconsistencies in the development and implementation of investment policy by appointing a single agency to formulate policy and an inter-ministerial group to oversee implementation.
Subnational
Issues: The study points to local protectionism as both an impediment to foreign investment and a principle obstacle for China in fulfilling its obligations as a WTO member. As a remedy, the OECD recommends that Chinese officials prepare annual reports on local compliance on investment-related commitments and measures undertaken to address any departures from national policy.
Transparency:
The study points out that China continues to operate by internal, undisclosed rules, particularly at the local level, and recommends that the process of formulating rules and regulations on matters like taxation and labor benefits be made more transparent. China should also align official FDI statistics with international standards such as those recommended by the IMF and OECD.
Streamlining
the Approval Process: The study points out that unnecessary delays and obstacles in the approval process are a significant aggravation for foreign investors. The OECD recommends providing investors with a reasonable time limit for the consideration of projects and that China separate FDI approval by the State Development and Planning Commission (SPDC) from the SPDC’s function of approving investment plans by domestic state-owned enterprises.
Regional Incentives:
The OECD notes that the disparity in foreign investment between the Western and Central parts of China and the open coastal areas, is a growing concern for the Chinese government. The study recommends raising the standard of investment promotion and approval in the under-developed inland provinces. It also suggests organizing visits to these regions to familiarize foreign investors with their potential.
Restrictions
on Foreign Ownership: China already allows for full foreign ownership in a range of sectors and, by virtue of commitments made prior to WTO entry, it will open other sectors in the near future. However, even after fulfilling its WTO obligations, restrictions on foreign ownership will remain in certain select sectors. The OECD recommends that China publicly explain why some restrictions remain and commit to progressively allowing full foreign ownership in the future.
Questions
Related to the Catalogues for Guiding Foreign Investment: Following WTO accession, three revised catalogues for guiding foreign investment took effect, covering sectors where FDI was respectively encouraged, restricted and prohibited. The restricted category necessitates approval of investment projects by central authorities at the national level. The OECD recommends replacing these catalogues with a single short list of sectors that are barred to foreign participation and that it reconsider prohibiting FDI in the establishment of futures trading companies.
Licensing Criteria
for Banks: Following WTO accession, three revised catalogues for guiding foreign investment took effect, covering sectors where FDI was respectively encouraged, restricted and prohibited. The restricted category necessitates approval of investment projects by central authorities at the national level. The OECD recommends replacing these catalogues with a single short list of sectors that are barred to foreign participation and that it reconsider prohibiting FDI in the establishment of futures trading companies.
Capital Market
Opening: The expansion of foreign invested enterprises is limited by restrictions on capital-raising measures in China. The OECD recommends allowing more foreign invested firms to list on domestic stock markets and to allow them to issue corporate bond s on the Chinese market. Opening stock and bond markets to enterprises that are foreign-owned would enhance their role in the restructuring of China’s state-owned industries.
Intellectual
Property Rights: While the study acknowledges progress in the protection of IPR, the OECD identifies four outstanding problem areas – a lack of legal precision and incomplete enforcement, problems related to product liability, a lack of public acceptance of existing regulations and lengthy patent application procedures. The study recommends that China take the following 7 measures - further educate its populace; allow all holders of IP rights, both foreign and domestic, to seek enforcement; establish minimum penalties for all categories of infringement; organize a system of best practices sharing among regions; better implement existing copyright law and shut down markets where pirated goods are sold.
Corruption:
While China has made some progress in combating corruption, it remains a significant problem for foreign investors and a major deterrent to increased investment. The OECD recommendations for greater transparency and respect for the rule of law will help remedy the situation, but China should also deepen its cooperation with the OECD on its on-going initiatives in this area.
Rule of Law
Issues: The OECD points out that concerns about the judicial independence and competence of the Chinese legal system, as well as the accountability and transparency of the legislative process, significantly effect the investment decisions of foreign firms. The OECD notes that reforms designed to enshrine the rule of law will instill investors with greater confidence in Chinese institutions.
Transparency of Tax Legislation and Regulations: The OECD identifies complex and confusing tax regulations as a significant problem for foreign investors in China. The OECD recommends that all tax legislation and regulations affecting foreign investors be made more readily available.
Other Regulatory
Areas: The OECD identifies regulations involving labor compensation, the environment and social policy as significant issues for foreign investors in China. The OECD recommends that the central government develop and implement a national body of regulations in these areas and make them readily available to foreign employers.
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OECD
China FDI Study