China Gets Cold Feet For Foreign Investment

New Regulations Spawn Fears of Economic Nationalism

Bo Xilai, left, China's commerce minister, meets with Carlos M. Gutierrez, his U.S. counterpart, in Beijing. (By Jason Lee Via Bloomberg News)

SHANGHAI -- "I know you don't know that you don't know."

Those insulting words, thrown out by a Chinese man to a Westerner, are the punchline of an Internet commercial that ends with a beautiful Chinese bride jilting her confused Western fiance for the Chinese hero.

The wildly popular video was created by Baidu, a Chinese search engine, to poke fun at its U.S. competitor, Google. It is but one of the growing signs that China is rethinking its stance on foreign companies and investment within its borders.

Since the mid-1990s, China has aggressively courted foreign investment, crediting capital from abroad with helping it become a world economic power. In recent months, however, the Chinese government, saying it needs to protect homegrown companies from unfair competition, has thrown a multitude of new regulations at foreign firms seeking to do business in China.

While some believe the new restrictions -- which affect several sectors, including real estate, retailing, shipbuilding, banking and insurance -- may be only temporary measures to control growth, others worry that there's a larger political issue: that economic nationalism or even protectionism is rising.

"A mood of self-questioning has swept over China," said Barry Naughton, an economist at the University of California at San Diego. In a report published in the China Leadership Monitor, Naughton said he believes the regulations are a response to government fears of a "loss of economic sovereignty."

China's shifting policies on foreign companies have prompted several U.S. firms, which complain that the new rules are too restrictive and overly complex, to reassess their plans in China.

Last month, eBay said it would close its Web site in China, saying it was facing difficulties because Chinese regulations limit the types of financial transactions foreign companies can conduct. In November, Warner Bros. International Cinemas, part of Time Warner, which had been planning a massive expansion in China, abruptly announced plans to close operations in the country. It cited a recent policy change that no longer allowed foreign companies to control domestic theaters except in a handful of large cities.

The Chinese government steadfastly maintains that it still embraces the policy known as gaige kaifang-- literally, reform and opening up -- initiated by Deng Xiaoping in 1979. However, several Chinese officials have in recent months called foreign investment "malicious" and promised "severe measures to curb and punish hostile takeovers aiming to monopolize the Chinese market."

China remains the largest recipient of foreign direct investment among developing economies. But after a decade when heavy capital flows from abroad were credited with bringing the country out of poverty, that investment is leveling off.

According to the Commerce Ministry, foreign investment in 2006 decreased 4 percent from the year before, to $69.5 billion. The United States' piece of that dropped 6.4 percent, to $2.87 billion. (China receives additional investment from American companies that, for tax purposes, have their headquarters in places like the Virgin Islands.)

The significance of the new regulations has been debated at the highest levels -- U.S. Commerce Secretary Carlos M. Gutierrez said it was a key subject of the Cabinet-level talks with Beijing in November -- and on Internet bulletin boards where the Baidu-Google video has been distributed under the headline "economic nationalism."