China bites the foreign hand that feeds it

An increasing number of foreign businesses claim they are being unfairly treated by Chinese regulators. Should Australia be worried?

China’s economic miracle could not have happened without foreign direct investment.

When former Chinese premier Zhu Rongi addressed his cabinet for the last time in 2003, the straight-talking architect of China’s economic transformation put it bluntly: “Foreign investment has spurred reforms in the state sector, improved enterprise and sales management systems, all of which are beyond our imagination.”

Fast-forward to the present and an increasing number of foreign firms are now raising their voices about what they see as unfair treatment at the hands of the Chinese regulatory authorities.

A recent string of anti-monopoly investigations into foreign firms have led to complaints from the European and US business chambers that their members are being unfairly targeted.

A new report by the US-China Business Council has revealed that 86 per cent of its member companies are concerned about the enforcement measures, with 30 per cent fearing the laws will be used against them.

The American Chamber of Commerce released its own survey this week that showed 60 per cent of respondents felt foreign businesses were less welcome in China than before. Last year the number was 41 per cent.

The two surveys follow complaints from the European Chamber of Commerce in August that echo the same concerns and claimed China was using strong-arm tactics in their enforcement of the rules.

In an interview with China Spectator, Australian Chamber of Commerce chair Tracy Colgan says that while the recent developments were of concern, Australia’s business engagement with China was different to the US and Europe.

“These companies that we’re talking about are actually embedded in this economy. Those big companies have been here for a long time, and they’ve got substantial manufacturing and sales channels,” she says.

In contrast, Australia’s business in China was more focused on trade rather than investment, Colgan says.

“A lot of those members aren’t manufacturing and selling here, there’s a lot in the service industry, and lots of big traders -- it’s trade and not investment. ”

However, Colgan says she has noticed a huge difference in the way foreign businesses have been treated, but that much of that was because the needs of the economy have changed.

“In the past foreign companies were important. I think foreign investment drove a lot of the growth here and now that’s changing, so perhaps it’s not as important when there are local alternatives,” she says.

Colgan would know. She’s lived and worked in China since 1987 when she came over to study poetry and economics. In the three decades she has worked in China, Colgan has been able to get a firm understanding of the China market.

Colgan’s firm, Kamsky Associates was the first of its kind to be registered in 1980. It set up China's first wholly foreign-owned enterprise, which it negotiated before the corresponding laws were even finalised.

As the Chinese economy has evolved, her firm’s work has changed too, shifting from a focus on inward investment, foreign direct investment, joint ventures and greenfields to more outbound work, corporate advisory work and troubleshooting.

The work has changed, says Colgan, because the needs of the economy have changed. The increased scrutiny of foreign and domestic firms is largely a result of the maturing economy.

“You could argue that that’s actually representative of China moving towards a more level playing field in many ways, you don’t have that preference for foreign investors,” she says.

Colgan says the recent increased scrutiny of foreign firms should be seen in the context of a clear policy push from the Chinese government to increase the market share of local companies and help develop national champions.

The investigations were concerning, but the issue is with how the rules and regulations are being implemented rather than the content of the laws themselves. The Chinese authorities are using the rules on the books, Colgan says, but “I wonder about the implementation, whether it’s as balanced as it could be.”

She says it’s possible the laws were being applied selectively.

“There are other local companies suffering under other recent developments but I would imagine that when it comes to the anti-monopoly laws there will also be local companies that could also easily be looked into.”

It was perhaps inevitable that foreign companies -- many of them in joint ventures with Chinese state-owned companies -- would attract more scrutiny at first. Australian companies have been spared so far.

But until more local companies are investigated, the perception that foreign companies are being singled out unfairly could grow and the international business community will lose faith in China’s economic reform agenda.