Reform agenda inspires foreign investment optimism

Foreign firms are looking forward to a more open market in China, as the leadership of the world's second-largest economy highlighted the market's role in its newly released reform agenda.[Special report]

China unveiled its reform blueprint for the next decade as the Communist Party's third plenum congress concluded on Tuesday, stressing that it would allow the market to play a more "decisive" role in allocating resources.

The blueprint vows to relax market investment access thresholds, facilitate the development of free trade zones (FTZ) and further open inland markets in a bid to build a unified, fair and open market.

"It does provide a malleable framework that acknowledges a fundamental need for government control to be ceded to market forces and so could still lead to meaningful changes during practical implementation," said Davide Cucino, president of the European Union Chamber of Commerce in China.

China is the largest trade partner of the ASEAN, the second-largest trade partner of the United States and the European Union, and a key trade and investment market for other major economies. With the heightened stress on an open market, it is hoped that foreign investment can play a bigger role in China's push for economic upgrading.

"The decision will usher in a 'diamond decade' for Sino-Asean cooperation and promote an upgraded version of the ASEAN-China Free Trade Area," said Xu Ningning, deputy secretary-general of the China-ASEAN Business Council, as the two parties decided in October to scale up two-way trade to one trillion U.S. dollars by 2020, more than double last year's trade volume.

In the months leading up to the third plenum, China has taken steps toward a more open market, including liberalizing lending rates, allowing greater private investment into sectors previously dominated by state-owned enterprises (SOE), cutting 221 administrative approval procedures, and in particular setting up the trailblazing Shanghai FTZ.

As the largest economy in the EU, Germany has about 4,500 companies doing business in China. And according to a recent survey by the German Chamber of Commerce in China, most of them have confidence in the chances of China's investment environment improving, and will invest more next year.

"China provides a dynamic business environment and growing sales opportunities, especially in regards to the fast-growing middle class," according to Alexandra Voss, executive chair of the chamber in north China.

However, there is still a long way to go before China achieves an open market as existing interest groups retain enough influence to inhibit foreign firms from flexing their muscles in the world's number-two economy.

Opaque investment approval procedures, and a lack of effective administrative and legal recourse when investments are denied, pose huge barriers to potential benefactors of the Chinese economy, said Greg Gilligan, chairman of the American Chamber of Commerce China.

The Chinese government is aware of the current barriers and acknowledges them, Voss said, and "China has the potential to foster an open and unified market through means such as simplification of investment access and regulation of energy and water prices via market forces."

While the reform statement was short on details, specific measures are expected to be kicked off over the coming years by state agencies under the guidance of the leadership group.

The new leadership set a deadline to see concrete realizations of the reform targets by the end of 2020 and it may take a long and painful process given the vested interests.

Cucino believes there is a requirement for urgent structural changes and bold, truly comprehensive reforms, including to the financial system, as well as steps to bring SOEs into equal competition with private players.

"Crossing the river by feeling for stepping stones is necessary, but the river is already starting to swell and firm ground on the opposite bank needs to be reached soon," he added.