When is a loosening of foreign investment rules not really a loosening of foreign investment rules? When China’s doing it in the face of a brewing trade war.

The country’s latest so-called “negative list” issued last week, which comprises a group of industries where foreign businesses are either prohibited from investing or restricted to joint ventures with a degree of Chinese control, boasts an eye-catching headline number: The number of sectors is down to 48, from 63 last year and 120 back in 2011.

In theory, that means large swathes of the Chinese economy that were once closed off to overseas competition are finally opening up. In practice -- as we argued when President Xi Jinping first promised the changes back in April -- the difference is mostly cosmetic.

The core list of industries where offshore investment is altogether prohibited is more or less unchanged from last year. The most striking alteration is likely to provoke guffaws in foreign capitals: International arms manufacturers now appear to be allowed to set up shop, should Raytheon or BAE Systems be looking to test how robust their protections against Chinese industrial espionage are these days.

That change is typical of one of the major ways the negative list numbers have been gamed in recent years: By removing industries from the list whenever foreign investment is vanishingly unlikely, Beijing has been able to proclaim a more open market while in practice making little tangible difference.

Some of the key eliminations from the forbidden list in recent years have been in sectors such as ivory-carving, tiger bone-processing, gambling and the sex industry. I’m no lawyer, but if you’re looking for Beijing’s permission to set up a casino-brothel with a sideline in endangered-species trade, my guess is that it’s not just the negative list standing in your way.

Another trick has been to permit investment in sectors where local players are so dominant that only the foolhardy would dream of trying to compete.

Fancy taking on China Petroleum & Chemical and PetroChina in the fuel-retail market; or State Grid Corp. of China and China Southern Power Grid in the electrical-grid business; or China Rail Construction to build new railways?

Last year you needed a local majority shareholder, but now you can knock yourself out -- the market is wide open, according to the latest list. Anyone who wants to take on state-owned oligopolies in operating rail services, trading most farm products or building ships is also welcome to try their luck -- but the core rule of antitrust has always been that when the market share of the incumbent players is that high, it’s all but impossible for new ones to break in.

The most dramatic changes are those to financial-services companies and automakers, which will have foreign-ownership caps abolished eventually. But those changes have been promised long before now, and won’t take effect until 2021 and 2022, respectively. Ownership caps on aircraft manufacturing firms are out, too -- but Airbus and Boeing have already established final assembly plants in China under joint-venture agreements, and aerospace companies tend to keep their main facilities close to home for political reasons.

That’s not to downplay the real changes that are taking place behind the scenes.

China is working to improve its lax enforcement of intellectual-property protections and to codify its array of ambiguous and inconsistently enforced rules, though progress has been so grindingly slow that it’s little surprise some in Washington have dismissed the whole thing as a con-job. The changes in auto manufacturing, finance and aerospace are real, although it remains to be seen how they will play out in practice.

At least China is moving in the right direction. It remains one of the most restrictive countries in the world for foreign investment, according to an OECD-compiled index, but it’s improved dramatically in recent years while the US has slipped behind the organization’s average.

For all that China’s negative list is gamed, it does give foreign investors a clear indicator of which industries are most protected. That‘s a contrast the vague “national security” or “national interest” grounds that have allowed other nations to protect lightbulb manufacturers, cattle ranches and yogurt makers from takeovers, not to mention President Donald Trump’s on-again-off-again pledges to further crack down on foreign investment by China.

Still, at this point the fan-dance over the negative list is becoming increasingly pointless. Maybe next revision we’ll see the long-protected market for traditional rice paper and ink-blocks opened up, just as the ones for lacquerware and cloisonne enamel have been set free in recent years.

Until current trade tensions ebb, though, we’re unlikely to see this particular door open more than a crack further.


By David Fickling

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. -- Ed.

(Bloomberg)