China relaxes investment restrictions in the wake of a “unprecedented” outflow of foreign investors.

After reducing its so-called negative list for market access, China will open up more areas of the economy to local and foreign investment.

On Friday, China’s state planner unveiled a condensed list of industries in which foreign investment is either limited or prohibited.

According to a document provided by the National Development and Reform Commission, the list for 2022 includes 117 industries, down from 123 in 2020.

Non-listed industries, which have been rapidly dwindling in recent years, are open to all investors and do not require special clearance.

Such measures to liberalize the economy, according to Hans Hendrischke, a professor of Chinese business and management at the University of Sydney Business School, have been in the works for some time.

“In China, the private sector and economists are pressuring the government to make more significant changes, while the government continues to insist on gradual reforms like pilot zones,” Hendrischke told Al Jazeera. “I don’t believe this is a purely cosmetic change.”

The publication of the list coincides with a large exodus of foreign investors from China as a result of Russia’s invasion of Ukraine.

The Institute of International Finance warned on Thursday that “extraordinary” withdrawals from Chinese equities and bonds could be linked to Moscow’s growing isolation over the war.

Despite expressing worry about the crisis, China has declined to call Moscow’s military offensive an invasion and has opposed sanctions against its strategic partner. If China provides tangible backing for the conflict, US President Joe Biden has threatened China with vague “consequences.”

‘Capital outflows in a negative pattern’

Beijing would be concerned about investment outflow out of China, according to Alicia Garca Herrero, chief Asia Pacific economist at Natixis in Hong Kong.

“Of course, it’s too early to destabilize the currency or cause a ruckus, but I believe they are quite concerned,” Garca Herrero told Al Jazeera.

According to Garca Herrero, Beijing may use foreign investment as a deterrent to the sanctions imposed on Russia by the US and its allies.

“For starters, it fosters interdependence. The more FDI that flows into China, the less probable it is that nations with significant FDI will choose a road similar to [that taken by] Russia. “Basically, you have assistance,” she explained.

“As a result, they want to open and attract those investors who will subsequently lobby on their behalf.” Second, this, of course, entails finance. It has the potential to reverse the current very negative pattern of capital outflows.”

According to a US State Department review, China has opened up a wider number of industries in recent years, including financial services, but the country remains a “very restrictive investment environment” for foreign companies. For the first time in 2020, China surpassed the United States as the top destination for new foreign direct investment, owing in part to the detrimental impact of the COVID-19 epidemic on other economies. According to the United Nations Conference on Trade and Development, China received $163 billion in inflows in that year, compared to $134 billion in the United States.

At the same time, Beijing has started a series of broad crackdowns on private enterprise as part of its “shared prosperity” push, putting digital companies, real estate, and private education under increasing scrutiny.

Beijing has a motive to encourage investment, according to Heng Wang, a Chinese economy researcher at the University of New South Wales.

“When it faces the economic slowdown, it would be vital for economic development and job prospects,” he told Al Jazeera, adding that China could increase its attractiveness to investors by offering openness, predictability, and impartial dispute resolution systems.

“Technology may also be brought in by foreign investors.” On the other hand, how regulatory practice, including that relating to the negative list, evolves remains to be seen. This extends beyond the negative list to include a broader range of issues such as taxation, intellectual property protection, and dispute resolution. It would be interesting to see how China handles the concerns of market liberalization and increased control.”

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