Western private equity firms may have met their match in the imposing form of the Chinese Government. That at least is one conclusion which might be drawn from the Peoples Republic’s issuance of its latest Foreign Investment Catalogue, published towards the end of last year.
The very name of the edict, which updates a 2002 version, is potentially misleading (albeit unintentionally). In the West, after all, one might assume a catalogue to comprise a list of items, all of which are for sale. China’s version does indeed list industries where the injection of foreign cash is “encouraged” but, by the same token, other industries where it is either “restricted” or “prohibited”.
In the “encouraged” category is renewable energy. This is not surprising given the solutions that China needs to find in order to address its long-term environmental challenges. Another area where foreign capital and know-how is officially welcomed is service outsourcing as China attempts to tackle neighbouring India’s current dominance in the field.
Elsewhere in the Catalogue can be found less appetising details from an investor perspective. In its efforts to alleviate the prospect of an overheating economy, the real estate sector finds itself substantially ring-fenced. For example, foreign investment in the construction and development of residential housing is removed from the “encouraged” category, while the “secondary” property market (e.g. estate agents) is dropped into the “restricted” basket.
Perhaps most controversial is the harder line taken against foreign investment in China’s media sector. The role of the media has always been a sensitive issue in China, but the door to apparent liberalisation was opened in 2004 when permission was granted for foreigners to set up joint ventures for television programme production (under the government's Order 44).
Since then, the government has appeared to backtrack while not officially revoking Order 44. The 2007 Catalogue, however, quashes any hopes of a return to the spirit of 2004. Not only does it formally prohibit foreign investment in radio and TV production, it also places a number of other media-related areas out of foreign reach including news websites, internet cafes and online gaming operations.
The message is clear: where foreign private equity firms can serve a useful purpose in China, their presence is tolerated. Where no obviously useful purpose exists, they must stay well away. The Chinese Government is keeping Western private equity on a tight leash.
And for now, if you want to play ball, a working knowledge of Mandarin is helpful. The catalogue in full is only available on the National Development and Reform Commission's Chinese langauge site.