New Regulations Spawn Fears of Economic Nationalism
By Ariana Eunjung Cha
Washington Post Foreign Service
Friday, February 2, 2007
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."
Negative publicity on blogs and chat rooms linked to by popular Chinese portals Sina.com and Sohu.com is credited with fueling criticism of several high-profile deals.
For instance, the District's Carlyle Group tried in 2005 to buy an 85 percent stake in Xugong Construction Machinery, a market leader. Xiang Wenbo, chief executive of a state-owned rival company, wrote on his personal blog that the government shouldn't permit the sale of valuable strategic assets like Xugong. After he and other opponents waged a months-long online campaign against the deal, Carlyle scaled back its offer, taking a 50 percent stake.
Albert Keidel, a former U.S. Treasury official now at the Carnegie Endowment for International Peace, said there seemed to be a sense among ordinary Chinese citizens of "how much are we going to allow foreign companies to continue to take advantage of us?"
Egged on by a public concerned about the growing influence of foreign companies, the Chinese government in July placed restrictions on the purchase of real estate by foreign individuals and institutions. The next month, it put a moratorium on foreign acquisitions of brokerages and limited the competitiveness of foreign-funded retail companies.
In November, the government issued new guidelines for cross-border mergers and acquisitions, making it more difficult for foreign companies to be involved in deals with companies related to "national economic security" or those that have a "famous trademark" or "traditional brand."
In a report issued last month, the Organization for Economic Cooperation and Development complained that the new regulations were so vague that they "may have a serious unintended discouraging effect on investments."
Some economists, however, say fears about Chinese nationalism and protectionism are overblown. Zhao Xijun, a professor of economics at Renmin University, said that rather than being seen as a hostile move against foreigners, the restrictions should be seen as "progress to a mature market."
Kenneth Louie, a visiting professor of economics at the Johns Hopkins-Nanjing University Center for Chinese and American Studies, points out that the United States limits technology transfers to China and restricts foreign purchases in defense industries.
"There are certain sectors China believes are vital to economic security, and there is a fear of a high level of foreign intrusion. The United States also has similar fears," he said.
Keidel said China has in a short period moved from a closed economy where foreign capital was not allowed to one that welcomes it, particularly in such areas as financial services, one of the key conditions China agreed to when it acceded to the World Trade Organization.
The conditions China ratified were quite specific and provided an industry-by-industry timetable. The new foreign-investment regulations do not seem to violate the letter of these conditions, Keidel said, though some parties have complained that they go against the spirit of the WTO agreement.
Richard Ji of Morgan Stanley Hong Kong said some companies have used China's new rules as an excuse for their own marketing or strategic shortcomings. He said that in the cases of Google and eBay, the companies' challenges have had more to do with failure to tailor the content of their Web sites to Chinese tastes and needs.
In the Baidu commercial about Google, the Western man begins by saying "I know" repeatedly as he stands, smirking confidently, next to his bride-to-be. But after the Chinese man bursts on the scene and the two get into a war of words, the Westerner becomes confused. By mistake, he says, "I know I don't know that I don't know" -- at which point the disgusted bride runs away.
So the commercial is "not about nationalism and protectionism," Ji said. "It says that it's localization that gives success. If you localize services, it means you understand the people you are selling to."
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