Clara Muriel Ruano of the Foreign Entrepreneurs in China blog, just did an article for the Asia Pacific Forum, entitled, “Media Perception of China: Myth vs. Reality,” contending there is no reason to worry about foreign investment in China and blaming the media for our believing otherwise.
As much as I love blaming the media, I completely disagree.
Ruano starts out by noting how there has been “plenty of media coverage on the deterioration of the business environment for foreign companies in China, but then seeks to entirely counter that with one inconclusive American Chamber of Commerce in Shanghai survey on the “Business Climate in China — 2010 1st Quarter.”
Ruano sets out the following key findings from that survey to support the claim that nothing has changed for foreign investment in China:
90 percent of companies feel their business either has improved or stayed the same in the last six months.
78 percent of companies feel the business environment either has improved or stayed the same over the past six months
Even within the 22 percent that perceives the situation to have worsened, 69 percent still feels that their business has improved or stayed the same!
63 percent of companies have not changed their company’s plans in the last six months.
Out of the 37 percent that changed their plans, more than 80 percent actually were increasing their activity in China (investment, manufacturing, procurement, R&D, etc.).
Ruano then asks why “if companies sound undeniably positive, then why is the perception we get from the media so unmistakably negative” and proceeds to list out the following as reasons:
There are plenty of some issues of concern, including a series of government announcements that have potential investors uneasy:
New regulations on foreign investment with its emphasis on welcome versus unwanted investments.
Tighter regulations affecting the creation of representative offices.
Tax increases for representative offices.
The Indigenous Innovation policy, which would discriminate in favor of Chinese technology when competing to access government procurement business.
Ruano then knocks down this “straw man” by noting how there “already have been previous announcements on favored investment industries; ROs may be further restricted, but WFOEs (Wholly Foreign Owned Enterprises) are easier and cheaper to set up than just a few years ago; and the Indigenous Innovation policy already has been modified to improve the access of foreign companies to government procurement business (updates on the Indigenous Innovation Policy draft).”
Wrong, wrong, wrong.
First off, the statistics on foreign companies doing fine in China and wanting to expand are completely irrelevant. These companies could be doing fine in China and wanting to expand there not because China is making things easier for them, but because China’s economy is booming and because China has 1.3+ billion people. The more interesting statistic is that 22 percent of those surveyed see the situation as having worsened, which is actually a much higher number than one might initially think.
And here’s why.
Take the Google and Rio Tinto kerfuffles. My view on those is that they will have little to no impact on the vast majority of my firm’s clients. I say this because the vast majority of my firm’s clients are neither in the internet search business nor do they plan to engage in bribery. In other words, enforcement of a particular law or a change in a particular law is usually not going to impact all that many companies and, on top of that, even if it is going to impact many companies, they often do not realize how it will until it does.
But the real point here is that Ruano does not cite any real evidence for the proposition that things are fine in China and for the contention that setting up a WFOE is easier and cheaper now than just a few years ago. In fact, the countless experiences of my law firm and the countless discussions we have with other lawyers actively engaged in seeking to advance the legal interests of their foreign clients in China is telling us just the opposite.
In “A China That Can Say No,” I set out the following concrete examples of how China is making things tougher on foreign investment:
– China’s local governments are more often delaying or denying applications for wholly foreign owned enterprises (WFOEs) and joint ventures. Chinese officials have come right out and said they no longer care whether foreign businesses come to China.
– Registration of technology licenses is more often being prohibited or restricted. The idea seems to be that Chinese businesses should not be required to pay for access to foreign technology.
– Visas for foreign workers are increasingly being delayed, denied or restricted. The view on this is that Chinese workers are available to do any job.
– China is greatly stepping up enforcement of its tax laws against foreign companies.
Now let’s just focus on forming WFOEs in China. I know of absolutely nothing that has happened in the last few years that would have made forming a WFOE any cheaper or easier in China, but my firm’s own personal experiences are saying that about 25% of the time in seeking to form a WFOE, we are being asked to provide documents that are nowhere required in the law and that we have not once been asked to provide in the previous five years. In the end, the officials have always granted us the WFOE, but these sorts of things do cause delays and do increase attorney time. My firm charges a flat fee on WFOE formation so we have “eaten” the extra time, but if this sort of thing continues (and I expect it will), we will need to reexamine our fee structure to account for it. Firms that charge by the hour are no doubt charging more in these circumstances. I have talked with a slew of other lawyers (both Chinese and foreign) who have told me they are experiencing the same thing.
Few if any of the companies already in China would have sought to form a WFOE in the last few months and those are the companies AmCham surveyed.
China is tightening the reins, at least somewhat, on foreign business and it is doing so in very small drips and I’d bet you would be hard pressed to find a lawyer representing foreign companies in China who would tell you otherwise.
The fact that it still makes complete sense for foreign companies to “play through” these drips and move forward in China as though they do not exist does not mean they are not there as they are.
The Wall Street Journal read the same AmCham report and concluded things are getting worse for foreign investment in China and in their article, entitled their article “U.S. Businesses Wary About Protectionism In China” their lead paragraph was on how China’s protectionist policies threaten their long term future:
A new survey from the American Chamber of Commerce in China indicated that concern is growing among U.S. businesses in the country that protectionist policies are threatening their long-term future in a key market, even while they remain optimistic about an economy that has rebounded strongly from the global recession.
The annual AmCham-China survey of its members–a barometer of sentiment among U.S. investors in China–reflects worries that China’s three-decades-long push for open markets could be stalling, as the government increasingly seeks to favor state-owned domestic enterprises that have spearheaded the economic recovery.
The article goes on to note how for “the first time in the 12-year history of the surveys, regulation tops the list of concerns among member companies, displacing worries about rising salaries, and recruiting and retaining key staff” and how “The main grievance is that laws and regulations are inconsistently applied around China, the white paper says, a problem that adds to the cost of compliance and results, for example, in delays obtaining licenses and approvals.”
Bingo.
“Foreign companies face long delays in gaining approval for mergers and acquisitions while Chinese applications face “little, if any, review.” Environmental laws are applied more stringently against foreign companies.”
Bingo.
What are you seeing out there?
