China’s Approval Process for Inbound Foreign Direct Investment: Impact on Market Access, National Treatment and Transparency

Executive Summary

China’s approval process for inbound foreign direct investment (FDI) drives many of the headline economic issues currently being discussed between China and its trading partners, as well as internally within China. A central feature of government-to-government talks is the concern, often expressed by foreign companies, that aspects of China’s inbound investment approval process impede their investment in China, extract valuable commercial concessions as a price for market entry, and favor domestic over foreign companies.

While some Chinese policy-makers believe these approval processes are helping China achieve its industrial policy and economic development goals, others believe that the time has come to rethink the state-directed development model China has relied on for the past 30 years, especially given slowing gross domestic product (GDP) growth, declining inbound FDI, and lagging competitiveness of state-owned enterprises. In particular, a February 2012 report published jointly by the Development Research Center of the State Council and the World Bank argues that in order for China to avoid the “middle-income trap” and further advance its economy, it must undertake fundamental reforms and move to complete its transition to a market economy.

China and the U.S. recently demonstrated their shared interest in further promoting bilateral investment by announcing in May 2012, at the Fourth Meeting of the U.S.-China Strategic and Economic Dialogue (S&ED IV), their decision to restart negotiations on a bilateral investment treaty (BIT). BIT discussions are also under way between China and the European Union (EU). Foreign investors are closely watching these negotiations and other interactions between the governments on these issues, as they may directly affect market access and opportunities to do business in China.

To fully understand and address the concerns of all of the interested parties in these discussions, it is necessary to understand the various elements of China’s inbound investment approval process and the stages in the process where the perceived problems arise. This process potentially involves eight different types of approvals, though the process varies somewhat based on industry and locale, whether the investment is in certain services industries, and whether it involves the purchase of a strategic interest in a Chinese publicly traded company.