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December 2021

China Trends #11
China’s Selective Opening Up: the Case of Foreign Direct Investment

François Godement
Special Advisor and Resident Senior Fellow - U.S. and Asia

François Godement is Institut Montaigne’s Special Advisor and Resident Senior Fellow - Asia and America. He is also a Nonresident Senior Fellow of the Carnegie Endowment for International Peace in Washington, D.C., and an external consultant for the Policy Planning Staff of the French Ministry for Europe and Foreign Affairs.

Viviana Zhu
China analyst, former Research Fellow, Institut Montaigne’s Asia Program

Viviana Zhu was Research Fellow at Institut Montaigne until January 2023. Prior to that, as Coordinator of the Asia Program of the European Council on Foreign Relations (ECFR), Viviana  was responsible for event coordination, reporting, and research support.

Mathieu Duchâtel
Resident Senior Fellow and Director of International Studies

Dr. Mathieu Duchâtel is a Resident Senior Fellow for Asia at Institut Montaigne, and director of International Studies.

Philippe Aguignier
Senior Fellow - Asia

Philippe Aguignier est, depuis septembre 2021, chercheur associé au programme Asie.

Philippe Aguignier a plus de trente ans d’expérience dans le secteur bancaire, dont près de vingt-cinq ans en Asie, dans les domaines tant de la banque commerciale internationale que de la banque d’investissement et du private equity. En Asie, il a été en poste au Japon, à Hong Kong où il a occupé plusieurs postes à responsabilités régionales, et en Chine, où il a été vice-président et administrateur d’une banque locale.

Il enseigne aujourd’hui l’économie chinoise à l’Inalco et à Sciences Po.

Philippe Aguignier est diplômé de l’École polytechnique, de l’ENSAE, et titulaire d’un doctorat en études extrême-orientales de l’Université Paris 3. Ses travaux et publications portent principalement sur les finances locales et les disparités régionales ainsi que sur l’évolution du secteur bancaire en Chine.



Mathieu Duchâtel,  Director of the Asia Program

"Let the breeze of openness bring warmth to the world" (让开放的春风温暖世界); "China will resolutely expand its opening up to the world" (中国将坚定不移扩大对外开放): these are the words from Xi Jinping’s two different speeches in November 2021. As the world faces unprecedented restrictions to people-to-people interactions with China – for which the Zero-Covid policy is only partly to blame; as Chinese society undergoes a sustained crackdown on pluralism, and as the Chinese economy takes a worrying inward turn and the idea of self-sufficiency arises, it is easy to dismiss this emphasis on further "opening up" as mere propaganda.

This Christmas issue of China Trends explores the environment for Foreign Direct Investment in China against these questions regarding the sincerity and the objective reality of the "opening up" narrative. The official line is clear. China has regained the status of no. 1 destination for FDIs because recent regulatory reforms have been highly successful. The People’s Daily argues that China is the “promised land” (应许之地) for foreign capital because the government has firmly and timely responded to the Covid-19 sanitary crisis with a series of measures reshaping the investment environment in China. In the aftermath of the adoption of China’s revised Foreign Investment Law in January 2020, the Central Committee has methodically issued signals of adherence to further opening up to FDI, especially in the finance sector. The "Work Measures for Complaints of Foreign-Funded Enterprises" (外商投资企业投诉工作办法) were released in October 2020, the "Catalogue of Industries for Encouraging Foreign Investment" was revised in December 2020.

The sources analyzed in this issue do not fundamentally contradict this official positioning. But reading between the lines uncovers gaps in the argumentation and leads to a more nuanced picture of the improvement in China’s regulatory environment – and of the political intentions behind those reforms.

Reading between the lines uncovers gaps in the argumentation and leads to a more nuanced picture of the improvement in China’s regulatory environment.

Viviana Zhu shows that despite the triumphant posture, and the impressive record of incremental reforms, Chinese experts are aware of the regulatory gaps to be filled. A historical perspective automatically underlines the amount of work put in building a legal framework and improving it over time. An enormous legislative compliance work has inevitably accompanied China’s accession to the World Trade Organization. These messages are objectively true but a communication strategy based on skillful omissions does not tell the full story of regulatory and hidden restrictions constraining the activities of foreign businesses in China.

François Godement puts the "opening up" narrative in the larger context of Chinese macroeconomic and industrial policies. China remains attractive to foreign companies, and this is a political success. But Chinese analyses also emphasize another side of good policy management: the capacity of the state to conduct open-door policies without undermining the space of Chinese companies. And indeed, 20 years after the country’s accession to the WTO, voices critical of opening up continue to shape the policy discussions in China. In fact, the sources analyzed for this issue often position themselves against those voices. What also emerges from the debate is the idea that foreign companies can be wooed because they will not have to follow the policy of their governments, which offers strategic space to China to counter the foreign forces that seek selective decoupling in some economic sectors.

Philippe Aguignier explores the case of the financial sector. Today, the share of foreign actors remains below 2% in both banking and insurance. Chinese commentators acknowledge the contribution of foreign financial institutions to the growth of China’s own financial sector – and in areas such as green finance or complex hedge-fund instruments, they still have know-how to bring. They tend to put the responsibility of their limited market share on the strategic choices of foreign actors, who have missed opportunities in the real estate sector for example, before the current storm. In addition, a higher rate of foreign penetration in China’s financial sector is not an objective in itself – and this is a lesson of the 1997/1998 Asian financial crisis.

These rationalizations about the limits placed on foreign businesses and the focus on the improvement of the regulatory environment in China skip over the rise of political risk. Chinese experts conveniently ignore this, as it is an overly sensitive topic for publication. Strengthening the regulatory framework deserves credit, but it will not protect companies from the risk of becoming collateral victims of geopolitical games on which they have no control whatsoever.

The Legal Path to Opening Up: A Twisted Narrative

Opening up is forever associated with Deng Xiaoping's launch of economic reforms in 1978. The notion has remained center stage in Chinese policy debates ever since, even during the periods of closure. To reach its strategic goals and fulfill its international commitments, China has been building and improving its legal system. Despite recent narratives of China’s closure and decoupling, both China’s capital inflow and international trade have maintained robust growth. Viviana Zhu, Policy Officer at Institut Montaigne’s Asia Program, outlines the history of legal reforms that accompanied China’s opening-up policies and explains how the narrative of opening up is often unrolled with a twist by Chinese experts and officials.  

Advertising - And Pleading - For the "Open Door"

Whatever the intentions of the United States or others, whatever the very real control and closure policies enacted by Beijing, China has never been more integrated into the global economy. What are the key strengths and promises of the Chinese market that attract foreign investment? What are the incentives for China to remain or further open? And how are the key figures in China’s economic establishment defending China’s success in opening up? François Godement, Senior Advisor for Asia at Institut Montaigne, unpacks some of the key policy debates taking place currently in China regarding the limits of the "open-door".

Eleventh-Hour Opening in the Financial Sector

China’s financial sector has undergone various rounds of opening up since the beginning of the reform era. One significant change occurred in 2001 when China joined the WTO and another cycle started in 2017. However, the market share of foreign players remains low (between 1% and 2% in both banking and insurance). Have foreign players missed their window of opportunity? Philippe Aguignier, Associate Researcher at Institut Montaigne’s Asia Program, looks into the three main sub-segments of the financial sector (banking, securities and insurance) and puts the Chinese narrative into perspective.

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