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Diversified Industrials: Horizons

Digitalization. Complex supply chains. Growing regulation and compliance. Conglomerates and industrials operate in an increasingly dynamic environment – one which requires creative solutions and forward thinking.

Is China truly open for (foreign) business? What investors need to know.

By Liang Xu

On its face, China's new foreign investment law appears to drastically open the country up to foreign investment – what with an ever-decreasing “negative list,” rules aimed at eradicating intellectual property restrictions, and simplified corporate governance rules, among other investor-friendly regulations.

Yet, while the pros certainly outweigh the cons, foreign investors still need to be aware of potential challenges and monitor developments as trade negotiations with the United States continue. This is particularly true for conglomerates, many of whom either have entities in China already or are looking to in the near future.

The good news for those already operating in the country is that, under the new unified corporate governance system, they won't face the complex web of rules and regulations they do now. When the five-year grace period ends, however, they'll have to do a thorough audit of their institutional documents to make sure they're in compliance with the new law.

U.S.-based organizations, in particular, should watch other areas closely. For instance, the Chinese government recently issued more cybersecurity rules governing businesses in China, and if foreign companies take over Chinese businesses in sensitive sectors, they may expect to come under national security scrutiny (as foreigners would in the U.S. under new CFIUS regulations). Significantly, China's approach to foreign investment is based on reciprocity rules, meaning that if other countries (e.g. the United States) refuse Chinese investments, they will likely receive similar treatment in China.

All this is to say that in many respects, China is open for business – foreign conglomerates, for example, have no need to team up with local partners in sectors that are not on the “negative list”; they can simply set up an entity and hire people to run the business there. The law's developing nature, however, along with geopolitical tensions, mean the legal situation will continue to evolve. In this context, knowing what to monitor and how to best prepare for potential shifts is key for those seeking to make a move in China anytime soon.

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