CHINA TO IMPLEMENT ITS NEW FOREIGN INVESTMENT LAW FROM JANUARY 1, 2020

Global investors hailed China’s new Foreign Investment Law (FIL) a breakthrough to resuscitate the Chinese sagging foreign investment, even though many commentators are dubious on actual implementation. Foreign investment has been an important boost for Chinese economy.

New FIL will replace existing three laws of Chinese foreign investment, viz, Chinese –Foreign Equity Joint Venture Law, Wholly Foreign Equity Enterprises Law and Chinese Foreign Contractual Joint Venture Law.

The new FIL exhibits four interesting characteristics to attract foreign investment. They are national treatment to foreign investors (barring negative list), banning mandatory transfer of technology, promising better protection to intellectual property rights and ensuring equal rights to government procurement. The new FIL will be effective from 1st January, 2020.

Even though China is the second biggest destination for FDI in the world (US $ 139 Billion in 2018), after USA, reforms in foreign investment policy was imperative. It was loosing sheen for low cost production hub and export back. Existing policies were too old and not conducive to support Chinese new economy, which is reliant on FDI. China is entering a new phase of economic development with a focus on technology oriented areas.

Given the downturn in Chinese growth and loosing foreign investment attraction, India and ASEAN are becoming more competitive .FDI in China witnessed a wafer thin growth as a negative impact of sagging GDP’s growth. During the four year period of 2015-2018, the annual average growth in FDI in China was 0.2 per cent (US $ 135 Billion in 2015 to US $ 139 Billion in 2018). China lost its paradise of low cost manufacturing base in the world, due to appreciation of Chinese currency Yuan and high cost for tackling environment.

FDI attraction in China transformed into new sectors. The proportion of FDI in manufacturing and real sectors was declining and larger proportions were invested in high tech areas, like IT, Artificial Intelligence, internet. The loss of China’s sheen was further aggravated by USA’s high tariff trade war, roiling China’s big advantage as an export hub.

Many MNCs either pulled out of China or adopted China+1 strategy. Instead of closing plants in China, they shifted to alternative low cost manufacturing bases in ASEAN and India. Thus, instead of relying on China as their sole beachhead in Asia, MNCs shifted their operations in ASEAN and India. Best Buy, an American electronics retailer and Media Market, a German company, put their shutters down. Revlon and L’Oreal stopped selling Garner brand in China. Tesco, a British retail giant, joined hand with local firm, declining to go alone as a salvage from China risk.

Eventually, ASEAN and India witnessed surge in FDI flow in the wake of relocation of plants from China or expanding their production bases by MNCs in India and ASEAN. The noticeable shifts were marked by surge in FDI in Vietnam, Thailand and India, owing to China becoming less attractive.

Singapore became the biggest foreign investor in India in 2018-19, surpassing Mauritius, Japan, UK, and USA. FDI from Singapore doubled during the three years period– from US $ 8.7 Billion in 2016-17 to US $ 16 Billion 2018-19.

It is believed that surge in Singapore investment in India is the transition of investment from China. Singapore is the second biggest foreign investor in China, after Hong Kong. But, its investment in China plunged after Chine dipped into low growth trajectory. During 2014 to 2017, Singapore investment flow in China dropped by over 73 per cent. This depicts Singapore’s overseas investment choice shifting from China to India, after China lost its sheen.

Close on the wheel, Chinese investment too sparked in India. It increased by over 145 per cent in 2018 over 2017.

In the run up, many Japanese opted for low cost ASEAN countries. In between 2016 and 2018, Japanese investment in Vietnam and Thailand soared by 180 per cent and 89 per cent respectively. Chinese investment followed suit. It increased by over 26 percent in Vietnam between 2017 and 2018.

Thus, China’s new FIL is likely to set a new template for FDI in China. With more doses of liberalizations, which will remove a number of irritants for investment in China, MNCs will have a second thought for dislocation of their plants or follow China+1 strategy for expansion. The bounce back in their wish list is feared to push a panic bell for India and ASEAN, who were benefiting from the deterioration of foreign investment climate in China.

FDI in India has been an important success story for Make in India, but it failed to be a steam for domestic investors. FDI surged from US 30 Billion in 2014-15 to US$ 44.3 Billion in 2018-19, witnessing a massive leap by over 46 per cent within five years. Will the bounce back of foreign investment climate in China impact FDI growth in India?

This raises a debate in the wake of China’s embroilment in trade war with USA. High tariff by USA limits China’s edge over India and ASEAN as an export hub, making Chinese goods costlier. Resolving Sino – USA tariff war in near term is farfetched. From January 2020, disgruntled Trump will go for more 10 percent tariff on China’s US$ 300 billion exports.

Given this situation, FDI in India and ASEAN is unlikely to be affected by China’s new FIL. Nevertheless, India needs to revamp its FDI policy as some major areas like multi-brand retail, housing construction need innovative approach.