Li Keqiang, China's prime minister, made a big promise to the world's business leaders at the World Economic Forum's annual gathering in Switzerland in January 2015. It was that China would introduce a new legal regime for foreign investment that would "treat Chinese and foreign companies as equals."
Its government has duly unveiled a set of revisions to its foreign-investment laws that came into force recently. The standing committee of the National People's Congress adopted the laws last month and bureaucrats drafted detailed rules.
The revisions, and the extent to which they fulfill Li's grand pledge, are an important indicator of how serious the government is about pursuing other initiatives to liberalize rules on foreign investment.
China is currently negotiating a bilateral investment treaty (BIT) with the United States.
U.S. businesses hope it will lead to greater market access. A BIT with Europe is scheduled to follow.
How, then, do the changes measure up? On the face of it, they involve a welcome shift away from the current regime, which obliges foreign firms to win numerous approvals and is both burdensome and often influenced by domestic politics.
The new framework pursues efficiency. Instead of demanding approvals, it seeks to usher in a simpler, registration-based system. Whereas the current approach is based on a long list of strategic industries in which foreign investment is either restricted or off-limits, the overhaul promises to replace it with a relatively short "negative list" of forbidden investments in areas such as defense and media.
According to some, such as Hogan Lovells, a law firm, the changes herald a sea change in China's foreign direct investment regime.
Yet the revisions leave intact much that is wrong. China has kept a complex set of rules restricting inflows for decades.
As well as the long-standing practice of deeming many industries strategic, the government still requires foreign firms to form joint ventures with Chinese companies and to hand over intellectual property via technology transfers. Repatriation of profits is tightly controlled. And because the approvals-based approach is likely to persist, despite official promises, every foreign investment is subject to the vagaries and corruption that comes with a one-party, highly bureaucratic state.
Most glaringly, there is nothing in the new changes that genuinely places foreign firms on an equal legal footing with local ones. The E.U. Chamber of Commerce in China dismissed the new reforms as "not bold enough." It issued a thinly veiled warning that the E.U. might make it harder for Chinese to invest in Europe.
Another big omission is the government's failure to tackle the problem of offshore legal structures known as variable interest entities, or VIEs. Foreign investment is banned in Chinese internet companies, but by getting foreigners to put money into VIEs to which the Chinese firm promises to pay dividends, many firms have got around this ban. A proper reform would have ended the ambiguity surrounding these vehicles. It was not forthcoming.
There are already signs of bureaucratic resistance even to the government's modest revisions. It is questionable, for example, whether officials will accept the shift from an approvals-based scheme to a registration system. Bureaucrats at the top economic planning agency, the National Development and Reform Commission, are said to reject the idea that the approvals-based system is coming to an end. They say the new rules are just a modification of the existing approach to foreign investment.
Meanwhile, multinationals are no longer clamoring to put money into China's slowing economy. Foreign direct investment has been flooding into China for two decades. Inbound direct investment reached a peak of nearly $300 billion in 2013 but has cooled off since.
Foreign inflows are slowing just as Chinese outward investments are skyrocketing. It seems exactly the right moment to roll out the welcome mat, but the changes going into effect fall well short of what multinationals had hoped for.
As Jake Parker of the U.S.-China Business Council, a lobby group for big American firms, points out, Chinese leaders have talked about lots of reforms but "the lack of implementation has created uncertainty about the policy direction and undermined confidence."