The Decision on Major Issues Concerning Comprehensively Deepening Reforms (the “Decision”) was adopted at the closure of the Third Plenary Session of the 18th CPC Central Committee on November 12, 2013. The Decision introduced the Comprehensively Deepening Reform Policy and the New Open Economy System. Since the Third Plenary Session of the 11 CPC Central Committee the Opening Up Policy started to be implemented, and from then on China has achieved outstanding social and economical developments.
Up to date, China is the world’s second-largest economy, the largest exporting country, the second-largest importer and foreign direct investment recipient, the third-largest outbound investor, and the country with most foreign exchange reserves. However, and despite those achievements, by reaching middle-income country levels, China is currently facing new challenges: labor and land costs have increased significantly (weakening the traditional production strength based on low-cost manufacturing), and the consumption of energy and other natural resources has also increased substantially, resulting in ecological imbalances and environmental degradation. Therefore, China is searching for a path to consolidate its traditional strength and create new ones regarding economic development.
China is experiencing the transition from being a major trade power to become a major foreign investing one (it means to turn from goods to a capital exporter one). Meanwhile, China is now a world’s major outbound investment county. In the past 10 years, China’s FDI has increased over 40% annually, and its amount has reached US$500 billion. However, several changes in the internal and external circumstances have brought more challenges. In the external level, the trend of economic globalization is changing from a multilateral trade system to regional free trade agreements. Furthermore, the world’s economy has being restructuring since the global economic crisis burst, and moreover, international industrial division and cooperation have been deeply impacted by the new technology revolution and by the rise of the emerging economies. In addition, the world’s acknowledgement and expectation from China also differs from how it was in the past. On the other hand, on the internal level, Chinese legal and administrative regulations on outbound investment are relatively lagging behind. Moreover, there are still improvements needed in the governmental review system regarding outbound investment, foreign exchange administration, financial service, import and export, and entry-exist for both citizens and foreigners.
In these circumstances, the Decision made a further adjustment on the outbound investment policy in order to point out the direction to be followed by the structural reform: “Expanding enterprises and individual outbound overseas investment, confirms the enterprises and individuals as the main bodies of the market”. The decision also highlighted that: “Enterprises and individuals will be encouraged to invest overseas and undertake contract and labor cooperation projects at their own risk, through greenfield investment, mergers and acquisitions, equities and joint investments.” Moreover, the Decision made changes to the financial policies on outbound investment: “Improve the market-based exchange rate formation mechanisms for the RMB. Accelerate interest rate liberalization and capital-account convertibility.” Based on the above information, the main practical significances of the Decision on Opening Up policy are as follows:
Firstly, the Decision has confirmed that enterprises and individuals are the main bodies of the outbound investment market. This may change the government’s current FDI policy support, from the special focus given to state-owned enterprises to a more importance to private ones. Private equity always plays a leading role on FDI. However, in China most of the stock of FDI is made by state-owned enterprises. One of the key reasons is that state-owned enterprises have a better access to financial support compare to the one offered to private enterprises. Considering that China’s market-based financing system is still being developed and that private enterprises’ FDI is constrained by the shortage of capital, provide financial support to them, such as governmental subsidies and low interest rates loans from the state-owned banks, would be very helpful when conducting their FDI. Such support may significantly improve the mentioned enterprises financing ability for outbound investment, untie them from the capital constrain, and make it possible for enterprises to achieve outbound merges and acquisitions, which consumes large capital investment.
Secondly, the Decision encourages “enterprises and individuals undertake contract and labor cooperation projects at their own risk”. This means that China is actively responding to the world’s economic changes and adjusting its outbound investment policy. Nowadays, the world’s infrastructure construction investment is reaching a new peak. While the demand of structure is changing, the construction operation mode is innovating, and contractors are undertaking more responsibility, there are new trends and new needs in the infrastructure construction investment field. Highlighting China’s comprehensive advantage of infrastructure construction, and combining outbound construction with financing of international infrastructure projects, Chinese enterprises would be in a stronger position when taking part in international infrastructure projects.
Thirdly, the Decision requires a bidirectional-opening up of the capital market. Through capital-account convertibility reform, the RMB and the USD funds would be able to invest in the local and foreign capital markets simultaneously, making cross-border transactions to be made by the funds a normal practice. Moreover, Chinese enterprises in their overseas merges and acquisitions would also benefit from the bidirectional-opening up of the capital market. In order to implement the RMB’s capital account convertibility reform, the government should make further financial innovation, explore and establish outbound investment funds based on market operation and implement outbound investment experiments on qualified individual investors. Meanwhile, in order to meet the needs of outbound investment developments, the government should also simplify the income tax payment and deduction procedures, and must require to the policy-based insurance institutions to stronger support outbound investment.
Finally, the Decision has also raised policies such as “expedite investment treaty negotiations with other countries and regions, deepen reform of administrative review and approval procedures on overseas investment, improve services such as the consular protection system, provide rights protection, facilitate investment and early warning on risks, and enlarge investing cooperation.” These policies provide stronger governmental support for Chinese enterprises to “go-out”. Moreover, by the assistance of further measures provided by the Decision, such as regulating investments not related to national sensitive industries by the governmental filing system instead of the previous governmental approval one, the government would increase its administrative efficiency, reduce costs and time.