China’s Government Reform and Implications for Foreign Investors

Dr. Jean-Marc F. Blanchard's picture

At present, the eyes of the foreign business community in China understandably are fixed on United States (US) President Donald Trump’s levying of tariffs on Chinese strategic goods, China’s retaliation, and the potential for the situation to escalate. While such matters warrant attention, the business community also should be alert to China’s planned government restructuring which will reduce the total number of ministries, eliminate some ministries like the General Administration of Quality Supervision, Inspection, and Quarantine, consolidate others such as the China Banking Regulatory Commission (CBRC) and China Insurance Regulatory Commission (CIRC), create new ministries like an international aid agency, and shift the oversight of some ministries.

Ostensibly, this reform is good news for foreign business confronting bureaucratic red tape, confusion over the division of government authority, and facing ministries captured by local business interests. Surface appearances can be misleading, though. First, one of the purposes of the reform is to improve Chinese Communist Party (CCP) control of ministries. This may be problematic for foreign companies given the CCP appears to embrace an economic policy favoring state control, parochialism, and security interests, not the market. Second, there is no guarantee new super-ministries will not be captured by local actors. Third, the heads of these super-ministries likely will be very powerful individuals which means turf wars and infighting likely will continue. Fourth, the elimination and consolidation of ministries means that past relationships may be lost. Fifth, China has gone through repeated government reforms since 1978. Yet it would be hard to argue that the environment has become friendlier for foreign direct investment (FDI) in recent years. This is because the policy environment, not just policy structures, matters greatly. In short, there is a need to see what exactly unfolds before proclaiming China’s government reform means a reformed environment for foreign investors.