Global investment needs Chinese inputs

ZHANG CHENGLIANG/CHINA DAILY

A new generation of global investment rules has been taking shape since the end of the 2008-09 financial crisis, and China should take a more proactive approach in joining the ongoing negotiations, reform its domestic regulations and better use the rules to protect its interests.

The world has experienced two generations of global investment system. The first appeared after the end of the World War II, with European-style bilateral investment treaties dominating the system, in which developed countries wanted to protect their overseas investments while developing countries emphasized their authority to regulate inbound foreign investments.

The second generation of global systems emerged in the 1980s, with US-style bilateral treaties playing a major role.

In this system, investment freedom was key, featuring pre-entry national treatment for foreign investors, higher standards in protecting those investors and the practice of allowing individual investors to resort to international arbitration systems in settling disputes with the investment destination country.

Another notable development during this time was that the first major attempt to have a comprehensive global investment agreement failed. In the 1990s, the Multilateral Agreement on Investment, initiated by the Organization for Economic Cooperation and Development did not materialize because of the great divide between developed and developing economies.

In the past, China missed opportunities to become part of the global investment system. The existing bilateral treaties it signed with other economies are basically its first-generation of treaties, a fact that shows how slow the country is in catching up with global evolution.

Now the world is in the process of shaping the third generation of investment systems, and it is important for China to analyze the new trends and map out its strategy to keep abreast with the times.

In this new round of rule making, emerging economies will surely play a much bigger role.

Since the 2008-09 financial crisis, global economic power has shifted. According to the International Monetary Fund, developing economies accounted for 50.4 percent of the world's GDP last year, based on purchasing power parity. It was the first time that developing economies outweighed developed ones in terms of size. This figure is forecast to hit 54 percent by 2018.

In terms of global investment, developing economies have gradually become major investors and important recipient countries. According to the United Nations Conference on Trade and Development, foreign investment into developing countries accounted for 54 percent of global investments last year. As for outbound investment, developing countries' ratio rose from 16.6 percent in 2008 to about one-third last year.

China made big strides, too. Last year, its inbound foreign investment hit $124 billion, the world's second largest. Meanwhile, its outbound investment amounted to $101 billion, making it the largest global investor after the United States and Japan.

But this round of rule making is dominated by big regional deals. The Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership, led by the US, and the Regional Comprehensive Economic Partnership, which includes China, would cover more than a quarter of the world's foreign direct investment.

Given this background, China must more actively participate in this round of global investment talks. If not, it will be left behind by global trends and find itself in an awkward position in protecting its investors and maintaining its attraction as a top investment destination.

In the past, developing countries such as China passively accepted global investment rules set by developed economies. But with emerging economies having more power and participating in the current round of investment talks, China must try to become one, if not a major, rule setter. If a nation is not part of the talks, how can it have its voice heard and translated into deals? In this sense, hesitation over joining US-led regional talks should be abandoned.

While bargaining between developed and developing economies continues during the negotiations, it is clear some norms have received wide acceptance. China must stick to these norms and boost its efforts in reforming domestic systems to make sure it can catch up with the demands of new trends.

For example, a high level of investment liberalization is the direction of all talks. Pre-entry national treatment, which gives foreign investors equal treatment before they invest in the destination country, and the negative list, which opens industries fully for foreigners when those industries are not on the list, are the two major requirements.

Fortunately China has already begun working in that direction - it is testing negative lists in Shanghai and Fujian's Pingtan island and is talking with the US about a bilateral treaty based on the negative list concept. What the country should do now is to pave the way for a nationally applicable list and overhaul its foreign investment regulations. Items that contradict the spirit of pre-entry national treatment and a negative list should be phased out.

Another thing that is highly likely to be included in the future global investment system is the regulation of state-owned enterprises. Since 2011, developed economies such as the US and the EU often have emphasized the need for limits on SOEs and have highlighted the principle of competitive neutrality, which advocates for leveling the playing field for state and private companies in terms of taxation, debts, policies and rules. The West often criticizes China for leaning toward SOEs, and the criticism has grown in recent years.

To cope with this, China needs to do two things. It must reform its SOE sector by advancing mixed-ownership initiatives, opening more fields for private companies and gradually withdrawing SOEs from competitive sectors.

At the same time, China should unite with other emerging economies that have big SOE sectors to win concessions for its State enterprises. These countries also should work together to press developed economies to grant equal treatment to investments by foreign SOEs.

The emerging global rules include another trend. They emphasize the power of destination countries to regulate incoming foreign investments. The 2012 World Investment Report by UNCTAD raised the idea of the "right" degree of state regulation, saying that it is the sovereign right of each country to expropriate private property in the public interest - subject to conditions stipulated by the domestic law of the host state and its obligations under international law. The US, for example, lists environment, national security, labor rights and financial security as top areas it wants to regulate.

As emerging economies become major global investors, developed economies such as the US, Germany and Japan all have intensified national security checks, but the scope of the checks is ambiguous.