China is a difficult country to figure out. With foreign investment sliding and the country keen to gain entry to the WTO, one would think the leaders in Beijing would be doing their utmost to convince the world that the country is continuing to open its doors wider to foreign investment. Over the past year, however, it has been far more successful in discouraging already frustrated foreign investors.
Take, for example, the decision earlier this year to ban the so-called China-China-Foreign (CCF) investment scheme. To get around a ban on foreign ownership in domestic telecoms operators, many foreign companies set up ventures with Chinese companies, which in turn invested in China Unicom.
Last year, however, Beijing decided that the CCF formula was "irregular," and so ordered China Unicom to terminate the contracts. The problem was that the decision froze some US$1.4 billion in investment from dozens of foreign companies which had thrown money into Unicom's mobile phone, paging and fixed wire networks. Some of the companies left hanging were Sprint, NTT, Bell Canada and France Telecom.
According to the official China Business Times, Unicom has halted payment of cash flows generated after Sept. 30 from the projects to foreign telecom partners, but has said it will repay the principal plus interest equal to China's bank interest with corresponding maturities.
Granted, the foreign companies that were using the CCF method were aware that what they were doing was technically illegal, but the central government was also aware of what was going on, and said nothing as billions of dollars flowed into these ventures, implying at least tacit approval.
More recently, there has been talk that foreign manufacturers of cell phones in China will face quotas in the China market, with the central government announcing that it will help local companies to grab at least a 50 percent control of the domestic market within three years. Local manufacturers currently have less than 5 percent of the market, which is dominated by Nokia, Ericsson and Motorola.
The government plans to bring about this radical change in market share by pumping Rmb 1.4 billion (US$169 million) into the domestic sector. The second policy is more direct: production quotas will be placed on foreign manufacturers. This despite the fact that foreign companies have made major investments in setting up production facilities, with no idea that the government would announce limits on their production.
Minister of Information Industry Wu Jichuan sent shock waves through the Internet sector earlier this year when he announced that foreign investment was not allowed in the domestic Internet industry, again after many companies had made significant investments in an industry that no one had previously said was restricted, and with the approval of local government agencies. Wu said restrictions applied to both Internet Service Providers and Internet portals.
Foreign companies, blinded by the supposed market of 1.3 billion consumers, continue to pump money into new Internet ventures, despite Wu's comments, with new Sino-foreign ventures being announced on an almost daily basis. If the expected new regulations include an outright ban on foreign investment, a strong possibility, the newcomers will only have themselves to blame.
There are already clear signs that the government is moving to control the content of Internet Web sites based in China. According to ChinaOnline, a Chicago-based Internet portal, an official Communist Party internal directive has already been given to major Chinese media and Internet operators. The directive reportedly prohibits China-based Web sites from using news from Web sites outside of China, and the Chinese media from using any news from any Web site. Furthermore, it said all China-based Web sites that have foreign funding or a relationship with a foreign entity must now submit full disclosure documentation on their operations, funding and backers.
There is evidence that the directive is already having its intended effect. Several major players in China have already begun to shift from an orientation toward news to e-commerce as a means of survival. According to ChinaOnline, Sinanet.com, China's largest commercial site, and one well-known for its news center, announced recently that it has decided to give up its content-news model and completely embrace an e-business model. Senior executives at Sohu have reportedly deserted that company to work for other Web sites with more of a focus on local community content, and Zhaodaola now puts more emphasis on "safer" content, such as entertainment and lifestyles.
One Western diplomat who frequently monitors Chinese-language Web sites has discovered a similar trend. Newshoo, which previously provided links to Chinese-language newspapers from around the region, now apparently only list articles found in government-controlled newspapers such as Hong Kong's Dakung Pao. Likewise, a recent check of Netease and Sina.com also found no foreign articles on these sites.
China watchers are dumbfounded by a set of new restrictions that have been slapped on companies carrying out market research, opinion polls, and consumer surveys in China.
The SSB has argued that the restrictions do not indicate China is "moving backward in the opening and reforming process." A spokesman for the bureau was quoted by Reuters as saying "we hope to restore the order of the market so that companies capable of providing good service will enjoy a better environment." Note, however, that the new rules do not apply to research activities carried out by domestic companies for their own.
The rules require that the SSB be provided with a copy of the contract, a written statement outlining the intent of research, and a copy of the questionnaire, which will require a 14-24 day working day period for approval. and that all completed research must be kept on file at the SSB. Finally, the rules state that surveys cannot duplicate research done by the SSB, which has commercial arms that also sell market data, making it both the regulator and a competitor in the market.
Some observers say the fear of espionage is behind the new regulations, and that the rules may not entirely be the work of the SSB alone. Xinhua quoted a spokesman of the SSB as saying that there had been "frequent incidences" where survey conducted by foreign pollsters "threatened China's national security and social and public interests." Some point specifically to an incident related to a Taiwan company, allegedly gathering "sensitive data" on transportation for a research project on distribution in China.
Foreign companies, which require exclusive market information to compete effectively, and who worry that the results of their research could be leaked to competitors, will now be less likely to carry out research projects. Industry insiders are already reporting a significant decline in the commissioning of new research since August. Should foreign companies be unable to obtain necessary market information, this could in turn further discourage foreign investment.
If China wants to be accepted as a legitimate member of the international economic community it is going to have to understand that it can't change its investment policies on a whim. More important, it must accept the fact that foreign companies invest here to earn money, and that there's nothing wrong with this.
Paul Mooney is a freelance writer based in Beijing.
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