Chinese Foreign Direct Investment Liberalization

Reducing the number of markets foreign investors are prevented from entering – down to 62 from 93 – marks a useful step in the right direction and should encourage investment into China, reducing the gap to the outflow. Investors should become more comfortable with China given the proposed new rules, but there is much to be done and reasons for pessimism. The proposals appear to be hobbled by caution and need to go much further to create a lasting impact.

More worryingly, the problems that the changes aim to tackle exist on a different scale to the alterations themselves. Money has been leaving China at an unprecedented rate and failings in investment choices have resulted in poor returns. Resultantly the gap between money leaving and coming back has become concerningly wide. The relaxing of rules regarding foreign investment is likely to be insufficient to change that significantly. Much money has been ploughed into mining and energy, two of the most volatile sectors. Worse still, the Chinese failure rate exceeds the global rate. Capital flight is unlikely to be severely dented by allowing new foreign investment into more markets.

Bolder action is required. Expunging the prohibited list altogether would have sent a more immediate and impactful signal to potential investors seeking new markets in China. Flows of money leaving China are not about to be reversed in the near-term in response to what amount to relatively cautious policy changes.