Let's be clear: Demand for private equity in China is not about the money. Awash with liquidity, China is not a place where you will thrive if all you can bring to the table is capital. Experience, access to top talent and technological know-how are instead the kind of characteristics likely to win you a fair hearing in a Chinese boardroom.
Given the clamour of foreign investors wanting to access opportunities in the country, China can afford to be selective. At the individual company level, firms can choose to partner only with those who bring genuine added value. At the state level, it means investment may be siphoned into those sectors where it is of most use at any given time – and diverted away from areas where it has no benefit or has already served its purpose. This enviable position is reflected in the latest Foreign Investment Catalog, which was issued by the Chinese Government's National Development and Reform Commission and Ministry of Commerce towards the end of last year.
The Catalog, which effectively updated a prior version issued in 2002, lists sectors in which foreign investment is either “encouraged”, “prohibited” or “restricted”. As such, it provides at least partial repudiation of the much-voiced allegation that the Chinese market lacks transparency (admittedly only partial since those officials involved in the approval of deals appear to posses a knack for taking clarity and blurring it).
There are other pluses for investors to consider – notably, industries in which greater investment is now being encouraged. One of these is renewable energy (e.g. solar powered equipment, recycling and pollution prevention) as China seeks to address its long-term environmental challenges. A second is service outsourcing as China attempts to challenge neighbouring India's outsourcing dominance.
Other of the Catalog's contents may be viewed as less appetising from an investor perspective. Perhaps the clearest example it provides of how China can simply switch off the foreign investment tap when it suits it to do so is in relation to the real estate sector. Property development in the country has seen substantial capital flows, but is now being made subject to significant restrictions. For example foreign investment in the construction and development of residential housing has been removed from the “encouraged” category, while the secondary property market (e.g. estate agents) has been placed in the “restricted” basket.
The clampdown on real estate investment has come as no great surprise however, and even those most affected by it might acknowledge that a compelling rationale exists. The Chinese Government is worried – and not without good cause, many pundits would say – that the economy is in danger of overheating. Applying the brakes to the runaway real estate sector might be seen as a reasonable attempt to pull the economy back from the brink.
Less expected, and more controversial, has been the harder line taken against foreign investment in China's media sector. Back in 2004, an apparent liberalisation of the sector was undertaken, one feature of which was permission being granted to foreign investors to set up joint ventures for television programme production (the so-called Order 44). The following year, the measure was effectively reversed by a moratorium on the establishment of such joint ventures – however, Order 44 was not officially revoked.
According to a Beijing-based private equity lawyer, hopes were high that sentiment would once more swing back in favour of foreign involvement in the media. But the Catalog quashes these hopes. Not only does it formally prohibit foreign investment in radio and TV production, but also places a number of other media-related areas out of foreigners' reach including news websites, internet cafes and online gaming operations.
In the case of the media sector, the state appears to have decided that it should be a purely domestic concern for reasons associated with the preservation of China's socialist culture. Western investors disconcerted by such apparent protectionism had better get used to it. The message of the 2007 Catalog, after all, is that the Chinese Government doesn't need your money, is not scared of causing offence and is calling all the shots – like it or not.