There is No Protectionism in China

China media and entertainment lawyer

Now that I have your attention with my Global Times-ish headline on protectionism in China, I am going to backtrack.

The protectionism people tend to attribute to China does not really exist, or at least barely so. The Chinese government does not care nearly as much about its domestic companies as widely believed, at least those that are not State Owned Entities (SOEs). Instead, the Chinese government cares almost exclusively about the Chinese government. Once you understand this, you will be better able to know where you, as a foreigner, stand.

I just read a China Hearsay post noting how China’s Ministry of Commerce’s recent approval of Yum! Brand’s purchase of Little Sheep Restaurant should put everyone’s fears to rest about China using its M&A review for protectionist purposes. China Hearsay was not surprised by this approval, nor was I. I figured the approval would come because the buy-out was not going to impact much (if at all) the things the CCP really cares about.

The Chinese Government is still uncomfortable with private business and it rarely, if ever, steps in to assist them just to assist them. Therefore, if you as a foreign business are going to be competing with private Chinese businesses, you likely will do okay. If you are going to be doing business in an arena dominated by state owned Chinese companies (SOEs), there is a much better chance of you having problems.

If you are going to be doing business in areas critical to the Chinese government, such as internet, publishing, movies, mining, defense, automobiles, you really need to be very careful about what you are doing, both in terms of its legalities and in terms of how you will be viewed by the government.

By way of an example, foreigners are not treated well in the movie business and many have cried “protectionism” because of this.  The Chinese government’s policy towards foreign films does seem like protectionism, but because foreign films are limited for informational reasons and not to protect China’s domestic film industry, calling it protectionism may not be appropriate, especially since there does not appear to be all that much love lost between Beijing and China’s own film industry. Mathew Alderson, a China media and entertainment lawyer, explains this as follows:

It is not the local Chinese film industry that wants to stop foreign films. Far from it. Barriers to entry such as China’s twenty foreign film quota, and the requirement that foreigners shoot their films in China as Chinese co-productions, are there to stem the invasion of Hollywood’s “corrupting” influences, which the  Chinese government sees as US propaganda or soft power. These barriers really have more to do with the government’s desire to preserve what it deems important than in protecting the local Chinese film industry.

The same is generally true with publishing.

But if your business is something like retail, or electronics manufacturing, then you probably have nothing to worry about from Beijing by way of protectionism . That is not to say you do not have other issues about which you should worry, including local governments that may not appreciate your being there, but odds are good you do not have an enemy in Beijing.

What do you think?

23 responses to “There is No Protectionism in China”

  1. Meanwhile the number of WTO cases against China has reached an all time high this year, and try competing in China against Chinese companies on a level playing field. It doesn’t exist, foreigners always pay more taxes, welfare and can’t get local bank loans.

  2. Besides harmful information, the government also seems to be pretty explicit about wanting to limit foreign films so that Chinese films have less competition. Besides the anime link I have below, I’ve read (though not in the past year or two) about SARFT limiting foreign movies so that domestic fare can develop free of more mature competition. Sounds like the P word to me.
    http://www.animenewsnetwork.com/news/2008-02-22/china-extends-foreign-animation-horror-fiction-bans
    “China’s State Administration of Radio, Film and Television (SARFT) has broadened its restriction on non-Chinese animated programming, including anime, on television. Starting on May 1, local stations may not show any animation that was not produced in China between the hours of 5:00 p.m. and 9:00 p.m. According to SARFT, this policy will serve to “provide a favorable environment for the innovation of China’s cartoon industry.”

  3. @ William. “How does the rejection of Coca-Cola’s bid to buy Huiyuan fit into this framework?”
    I would suggest classic anti-monopoly considerations came into the Huiyuan decision. Huiyuan is the only pure fruit juice producer with national distribution. Competitors fill either segment or geographic niches. A close look at supermarket shelves reveal a lot of beverage brands from a few major players, plus quite a few in very specific product lines from minor players. If Coca-Cola had acquired Huiyuan the combination would have further consolidated the sector, provided room to push prices higher and given Coca-Cola close to monopoly power in the juice segment.

  4. I think Dan’s general point is that the “Chinese Government” is more interested in itself than in protecting local private interests is well-made. If you need to co-operate with Chinese government departments or effectively compete with a public sector entity, then you will have significant difficulty and face major protectionist pressures. If your competitors are private players in a consumer facing sector, then “protectionism” is not such an issue.
    Other commentators have made the valid point (one that Dan has made many times) that foreign enterprises are held to higher standards than domestic enterprises in terms of taxes, social insurances etc. All true (though the tax gap between foreign and domestic enterprises is getting smaller as the SAT’s appetite grows). However foreign enterprises face far fewer demands for bribes, fines and other effective local government levies in each sector as they are presumed to be more compliant. Domestic enterprises face a significant overhead for keeping regulatory authorities happy; cash, flights, jobs for friends and relatives, donations to local ‘worthy causes’, meals, use of local consultants etc. It is not at all easy to operate local private enterprises in an environment which is not particularly friendly to private enterprises.
    Broadly speaking, foreign enterprises face few of the local demands for indirect payments and higher pressure for compliance with tax, social insurance, environmental regulation etc. Foreign enterprises are often given faster approval and face fewer local protectionist pressures in any local area. Obviously being seen as a better tax-payer has its benefits.

  5. Dan is right that what we often perceive to be protectionism may in fact be the government simply curtailing the activities that can be conducted in a given industry; however, the end result is often not dissimilar to protectionism.
    That being said, when you start exploring just the uneven enforcement of the tax code or regulatory barriers that are imposed only on foreign investment, then it becomes difficult to assert that the protectionism people perceive does not exist here. And this is even when you exclude protectionism and the abject greed that can occur on the provincial or district/county level.

  6. To use the Little Sheep acquisition (one data point) as grounds to argue there is no protectionism, frankly, begs the creditbility of this website.

  7. Dan : “The protectionism that people attribute to China is wrong. I have become convinced that the protectionism that people tend to attribute to China does not really exist, or at least barely so”.
    Brain seizure? Malaria? Reading The Global Times too much? Rabies? There must be some reason these comments have been made, although I’m jiggered I can find any rational explanation. Maybe a mis-timed Halloween prank?

  8. @Acqua – why not cite the actual y-o-y figures, and why not cite the number of WTO cases against the USA initiated by China? It might make your case more objective.
    To the others who attribute a non-level playing field to local customs, payments, etc. -nobody ever mentions the fact that the Chinese companies are still “taking a risk” in operating in this manner. MNCs have an option to as well, but their risks are much higher due to regulations imposed by western nations (FCPA, UK antibribery).
    If you weren’t from a nation which imposed these overseas regulations on your business in China, would you consider taking the same steps as these local companies? And if you’re not being “offered” to make donations and such, well maybe that is more of a networking issue than anything else.
    *I should qualify this by stating I am not a Chinese citizen. Chalk up the above to reading too many anti-China comments I’ve read on the internets this week.

  9. We do know that some estimates place well over half of the Chinese economy in the “state controlled” sector, right? I understand what you’re trying to say here, but at the end of the day, I’m pretty sure it’s a false distinction. Try framing the issue this way to any company in any of the following sectors: financial, automotive, aerospace, IT, telecom, television, radio, print media, film, green tech, traditional energy, construction, mining, chemicals, shipping, etc., etc., etc. We’re left basically with retail, fashion, and fast food. And, I guess, consulting. Foreigners in China love consulting.

  10. @ Chris
    Now there’s a novel argument. Let me see if i get this straight. Ok, we know our companies have subsidized land, subsidized capital, subsidized energy, low wages, managed currency, regulators who look the other way, and free rein to trash the environment. But our cost structure is uncompetitive because of all the officials we have to bribe. LOL!

  11. I might also add that to all those here that are defending China as not protectionist (because they screw their own private firms as well), thank you all for validating that China is not an “open market” per the WTO.

  12. It is something like this…
    1 – Chinese Gov
    2 – Chinese Gov SOEs
    3 – Chinese local firms with strong political connections / the quasi-SOEs
    4 – Local Chinese firms
    5 – MNCs with valuable IP and/or good Chinese Gov connections
    6 – The rest of the MNCs
    and the fact of the matter is if you are a small MNC in China you are bottom of the heap. Dont really think it matters what you call it (protectionism, protecting China’s interests etc.) but the effect is the same. A level playing field for MNCs just does not exist in China…

  13. Re-read the article people. Dan was clear that the title was tongue in cheek. Seems to me all he is saying here is that the Chinese government is out to protect itself and its own companies, not private companies. Nobody has disputed that. Once you take that as true, than your analysis should be influenced by it, which is what Dan is calling for here.

  14. I see where you are going with this and I agree. Once I started realizing where the Chinese governmetn was coming from, and started doing more than just looking at what it was doing, I started to realize what will work in China and what won’t. I like your headline and I like how it has angered so many people who just cannot see past their own preconcieved notions of what they see as going on in China.

  15. @ Hua Qiao ” But our cost structure is uncompetitive because of all the officials we have to bribe. LOL!”
    Don’t laugh…. I have worked for both MNCs and Chinese domestic private enterprises. While the tax and social insurance bills are lower for domestic enterprises (through minimization and evasion), I am consistently shocked by other “governmental overhead” they pay. Direct bribery is perhaps the smallest component. Being ‘required’ to take over (including debts and outstanding bills) bankrupt public enterprises is one major cost. Having to employ retired public officials in order to forward business objectives is another (and it is extremely expensive to have unproductive senior staff on the books). Employing friends and relatives of decision makers is another cost. Picking up all sorts of govt official bills is another (notice how each luxury car used by govt officials revealed by the media is always on loan from an enterprise) and that cost is significant. Over and beyond, the number of staff within a domestic mid to large private enterprise devoted to securing permits and permission and running through the formal and informal regulatory hoops is a significant cost. Being forced to undertake M&A to expand national operations in certain sectors because at a local level new operating licenses are not being issued (and current licenses inevitably are owned by the well connected) is also exceedingly expensive and frequently a barrier to expansion faced by private domestic enterprises.
    The point is that from a Chinese domestic private enterprise perspective there is little “protection” from foreign enterprises operating in certain sectors. At a local level, many private enterprises’ local govt costs are significant and they are treated as an informal ATM by local officials for both personal and official expenses. Chinese private enterprises are subject to all sorts of predatory and rent-seeking behavior from government departments and officials.
    Dan’s point was well made : “if you as a foreign business are going to be competing with private businesses, you likely will do okay. If you are going to be doing business in an arena dominated by SOEs there is a much better chance of your facing problems”.

  16. @Chris – all good points, but one of the assertions of the post was ignoring local level interference does protectionism exist in China? By simply looking at the complexity of and restrictions placed on FIE’s entering the market as well as indigenous innovation programs that excluded foreign or foreign invested local company participation, it is hard to argue that protections does not still ensue.
    As an aside, foreign firms are also targeted by officials for bribes and I have a number of clients that have been leaned on by local tax officials for pay offs. Regardless, although all of the avenues to fleece local firms that you have described (and more) are available to local governments; it become a chicken or the egg debate as to who initiated the relationship (is corruption only one-sided?) and I doubt private companies would continue to exist if they did not profit from the graft.

  17. You are saying that the Chinese government hinders foreign companies because:
    1. Domestic companies are easier to control for political purposes
    2. They don’t want foreign ideological or cultural influences
    3. They want a chance to let domestic companies prosper
    But that doesn’t really change the bottom line does it? None of these are justifiable with a fair trading partner. Even if these weren’t excuses for protectionism, the result is the same. Foreign companies run into all kinds of roadblocks and end up being harried and hounded until they leave China. To be fair all economies engage in some degree of protectionism, but I find China’s version particularly severe.

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