High hopes over investment pact

After a false start, talks between the world's two biggest economies to forge a bilateral treaty aimed at boosting investments in each other's markets are back on track.

Not surprisingly, news on Friday that the United States and China will resume stalled negotiations on a bilateral investment treaty (BIT) has sparked great expectations.

American firms hope it will open up vast business opportunities for them in some 100 of China's sectors from cars to finance, where Beijing currently imposes restrictions on foreign investment.

Chinese investors say they want the treaty to give them fair treatment in the US.

Some have been spooked by Washington's recent moves to block several attempts by Chinese firms such as network equipment provider Huawei from investing in sensitive sectors like telecommunications, citing national security concerns.

Still, Beijing's push to restructure its economy could unleash billions of dollars into strategic sectors in the US.

"American firms have a lot of technical and management expertise to offer in areas like biosciences and high-tech services," said Renmin University professor Zhao Xijun. "Chinese firms need this to upgrade and want to invest."

Some, such as American Enterprise Institute resident scholar Claude Barfield, also see a successful BIT as a potential stepping stone for China to participate in the Trans-Pacific Partnership (TPP).

Beijing had previously been critical of the attempt by 11 Pacific nations, including the US, Australia and Singapore, to forge a broad free trade agreement. But it recently indicated that it might be open to the idea of joining it.

If China were to agree to concessions under a BIT with the US, this "would lower one big obstacle to meeting the terms of the multilateral TPP, which covers both trade and investment", noted Dr Barfield, a former consultant to the Office of the US Trade Representative.

All these big hopes for the BIT are based on the more solid footing that BIT negotiations will restart on.

China had been been holding back from talks unless some of its industries, especially services, were exempted.

But this time, "it has agreed to negotiate, accepting that a BIT would cover all stages of investment", noted Dr Karl Sauvant, resident senior fellow of the Vale Columbia Centre on Sustainable International Investment.

China also agreed to a "negative list", where all sectors covering investment must be liberalised unless otherwise specified.

"Overall, I think this is a double breakthrough," he observed.

China's willingness to restart talks based on what the US calls a BIT model "with a high standard of investor protection" may reflect a new conviction that it does stand to benefit from the treaty as much as the US, whose investment environment is already more open.

As government think-tank researcher Yi Xianrong pointed out: "Only when both sides' interests are balanced can the BIT be signed."

The treaty "is consistent with the Chinese leadership's domestic reform initiatives", East Asian Institute scholar Sarah Tong noted.

In particular, top leaders have pledged to rein in state-owned enterprises (SOEs) whose dominance of many sectors has exacerbated economic imbalances.

Such reforms could be tied to economic commitments like the BIT and even the TPP, said Dr Barfield.

"One of the things the BIT will have to deal with are special rules needed for SOEs," he said.

This may include provisions for "competitive neutrality", where a government promises not to favour its SOEs and ensures a level playing field between private and public businesses.

This process will be tough - and could take years.

Chinese negotiators will have to tread carefully, since SOEs are still a critical part of the economy and financial system, and tend to be national champions leading the investment charge in the US and the rest of the world.

Meanwhile, Washington will have to deal with pressures to protect national interests when opening up sensitive sectors like defence and telecoms to Chinese firms.

Analysts said it is difficult to predict at this point if such sectors would be exempted from the "negative list".

Still, for every headline-grabbing blocked deal for firms like Huawei, "there are many other instances where Chinese mergers and acquisitions or greenfield projects have quietly moved ahead without attracting much attention", said Dr Barfield.

Chinese investments "into the US could be extensive over the next decade", with the potential to match the deluge Japanese firms brought in the 1980s, he added.

graceng@sph.com.sg

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