People wait at a pedestrian crossing as cyclists and vehicles move along a street in the central business district in Beijing, China. (Photographer: Giulia Marchi/Bloomberg)

China Opens Up More of Its Economy to Foreign Investors

(Bloomberg) -- China is slowly following through on pledges to open up to foreigners, as an impending trade war with the U.S. focuses attention on Beijing’s grip over doing business in the world’s second-largest economy.

On Thursday the government formalized the easing of foreign investment limits on a range of industries from banking to agriculture, updating its so-called negative list of industries where overseas investors are restricted or banned.

It’s an opportunity for the likes of Goldman Sachs Group Inc. and BP Plc to expand in an economy with 1.4 billion consumers. Among the changes, many of which have been previously announced, caps on foreign ownership of banks will be removed, ownership limits on brokerages and insurance companies will be lifted in 2021, and in 2022 for passenger car manufacturing. The country will also open up parts of its sprawling commodities sector.

The U.S. government and the European Union have repeatedly criticized the lack of openness in China’s economy, including barriers to entering certain sectors as well as the demands made of companies who do invest, such as the transfer of valuable technology. China’s relations with the U.S. are deteriorating, with both threatening to increase tariffs from early July and impose other restrictions.

The publication of the list comes at a "critical juncture in a looming trade war," said Gai Xinzhe, an analyst at Bank of China Institute of International Finance in Beijing. "The reduction of the list means there’ll be more opportunities for cross-border enterprises and it again declares China’s stance of anti-protectionism."

China is looking to increase foreign access to its market, both with these investment changes and also by cutting tariffs for various goods. Thursday’s statement by National Development and Reform Commission said that the number of sectors restricted for foreign investors is being reduced to 48 from 63 in 2017, and is effective from July 28.

Raw Materials

The nation’s massive raw materials industry featured heavily among the sectors removed from the list.

In a boon to the likes of Bayer AG and KWS Saat Se, China will end the cap on foreign ownership of companies that breed and produce seeds except wheat and corn. Earlier, foreigners weren’t allowed to take a controlling stake in joint ventures. It’ll also scrap limits on domestic purchases and wholesale sales of rice, wheat and corn. Foreigners will still be banned from breeding and producing genetically-modified crops, livestock and fish.

The NDRC will also scrap the rule that Chinese partners must hold a majority stake in the construction and operation of power grids, dovetailing with a broader reform of the electricity sector as the government pushes to cut overcapacity and inefficiency.

“Loosening the inflow of all forms of capital into the sector is a natural step for China’s power reform,” Tian Miao, an analyst at Everbright Sun Hung Kai Co. in Beijing, said by phone. “China’s power reforms in the past few years have pushed for better transparency on the cost structure of grid operators and the market’s role in power distribution.”

Power Grids

It could be attractive sector for long-term utility investors looking to diversify across markets and benefit from China’s strong economic growth, she added.

However, foreign investment in power grids won’t be significant in the near- to medium-term, according to Dennis Ip, an analyst with Daiwa Securities Group Inc. That’s because the sector is dominated by two operators -- State Grid Corp. of China, one of the world’s biggest companies, and China Southern Power Grid Co. As well, the outlook for investment returns in the sector is still unclear amid the ongoing reforms, he said.

Meanwhile, the likes of Exxon Mobil Corp., Royal Dutch Shell Plc and BP will be in a position to invest more in gas stations after the government scrapped the rule that a Chinese partner must hold majority share in a chain with more than 30 outlets, according to Li Li, a research director with ICIS China.

The new list also touches on rare earths, an esoteric mix of 17 minerals with an array of niche and often highly strategic uses, across multiple industries. China accounts for about 80 percent of the world’s supply, and triggered fears of a global shortage back in 2010 when it restricted exports. Now it’s giving foreign investors a slightly bigger role in the domestic industry, allowing them to operate in separation and smelting without entering joint ventures.

Rare Earths

It’s another step to reform a domestic rare earths sector that’s been heavily restructured in recent years to consolidate the industry and tackle heavy pollution. The list also lifts foreign investment restrictions in smelting of tungsten, a material used mostly in steelmaking that’s often found together with rare earths. But the moves “won’t be too meaningful at the moment as the rare earths industry is currently in oversupply,” Chen Zhanheng, vice secretary general of the China Rare Earths Industry Association, said by phone.

“China has been a strong advocate for free trade,” according to a white paper entitled ‘China and the World Trade Organization,’ issued by the State Council Information Office. “China has comprehensively fulfilled its commitment to the WTO, substantially opened its market to the world, and delivered mutually beneficial and win-win outcomes on a wider scale.”

In April, the country pledged to open its $42 trillion financial sector by lifting foreign ownership in everything from banks and insurers to mutual fund management and futures firms.

Securities firms like Goldman Sachs and UBS Group AG have an opportunity to boost their share five fold as they take more direct control of joint ventures, projections by Bloomberg Intelligence show. Insurers including AIA Group Ltd. are set to cash in on their already healthy presence, while banks like HSBC Holdings Plc and Citigroup Inc. face a steeper road ahead to build market share, but will reap juicy profits as they do so.

©2018 Bloomberg L.P.

With assistance from Editorial Board

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