Into the market: Easier market entry for some
- With “stability” as a central focus, and an economy still dependent on foreign investment and trade, 2022 will be an important year for improving China’s business environment, as stated in the 14th Five-Year-Plan (FYP).
- Following the reduction of the foreign investment negative lists, a catalog of industries closed to foreign investment, Chinese leaders also launched a campaign to prevent local governments from creating market barriers and curbing competition. Sectors that have been liberalized at the national level will likely see improved administrative procedures and business environment in 2022.
- In sectors which China deems strategic, incl. semiconductors, NEVs, etc., a different logic will prevail: the strengthened focus on self-reliance and indigenous innovation will likely shield these sectors from most liberalization efforts and even intensify “buy local” policies and preferential treatments for local companies.
In the market: Further tightened market supervision with new ‘risk score’
- In parallel to relaxing market entry, China has implemented a series of regulatory enforcement tools to improve compliance of those already in the market. The Corporate Social Credit System (CSCS) is one of these tools.
- Regulators are now adding a new function to the CSCS – a “risk score” – and plan to roll it out nationwide in 2022. The risk score will determine the frequency of government inspections at a company. The lower the score, the more inspections companies have to expect.
- While credit scores are mostly public and intended as a reputational check on companies, the risk score will not be public. It will be an internal tool for regulators to focus their supervision efforts on bad-behaving companies.
Comparative advantage for those companies most aligned with Chinese innovation agenda
- The “buy local” trend in public procurement and among Chinese consumers will continue to squeeze the market shares of foreign businesses in China. But those that contribute to China’s strategic innovation goals and/or succeed in credibly branding themselves as a “Chinese firm” can more effectively defend their space.
- Companies should explore and use preferential policies in China’s market reform pilots. Pilot areas will most likely be developed in megacities or city clusters, such as the Greater Bay Area. Some of the most relaxed measures on land, labor, capital and data markets will first be implemented in these cities/regions.
- Tighter supervision might wipe out some dirty players in the market. But make sure your company’s compliance system is aware of and adapted to China’s new market governance tools.