June 7, 2015 / 5:30 PM / 2 years ago

Souring China business climate risks U.S. investment treaty talks

BEIJING (Reuters) - China and the United States will swap initial demands for an investment treaty as early as Monday, sources said, but U.S. investors are already worried that an emerging raft of Chinese regulations could threaten the future of talks.

U.S. President Barack Obama (L) shakes hands with China's President Xi Jinping in front of U.S. and Chinese national flags during a joint news conference at the Great Hall of the People in Beijing November 12, 2014. REUTERS/Petar Kujundzic

In exchanging demands, the world’s two largest economies will outline industry sectors that each side deems to be closed to the other side’s investors. Such “negative lists” will define the scope of the treaty and are already months overdue.

China has more restrictions on foreign investment than the United States, and U.S. investors hope that a treaty will give them increased access to China’s many tightly controlled industries, from financial services to healthcare.

But three sources familiar with the treaty talks say U.S. negotiators expect Beijing to come up with an expansive “negative list”, noting that it has pursued in recent months new rules that could further restrict foreign access to sensitive sectors.

“After 35 years of reform and opening in China, there are enough data points out there to suggest we are now seeing a reversal,” one source said.

Beijing’s commerce ministry could not be reached for comment but it has said foreign investors enjoy ample opportunity in China. Beijing has also complained of restrictions on Chinese investment in U.S. infrastructure and technology, and says its firms are singled out in U.S. national security reviews.

However, China is pursuing legislation, including rules on national security and non-governmental organizations (NGOs), which are seen as aggressive and overreaching by some within the foreign business community.

For example, China’s draft National Security Law and Anti-terrorism Law, which could be adopted this year, call for the use of “secure and controllable” technology developed in China or which uses source code released to Chinese inspectors.

Another pending law on foreign NGOs, which includes myriad business groups, would give police broad supervisory power over their budgets, agendas and personnel decisions.

GROWING PESSIMISM

Those moves, along with fears that Chinese regulators are targeting foreign firms in competition probes, have led to decades-high levels of pessimism among foreign investors.

The American Chamber of Commerce in China wrote to the Chinese government last week to complain about the security law.

“It raises fundamental questions about whether future commitments by China to open its markets to foreign investment will produce the intended results,” the chamber said in a letter seen by Reuters.

It said the draft law risked “undermining the ongoing BIT (Bilateral Investment Treaty) negotiations”.

Commercial relations have also been soured by allegations from Washington that Chinese hackers have been behind recent attacks on U.S. government agencies and American companies.

Last week, U.S. officials accused Chinese hackers of a breach of government databases to steal files on four million federal employees, the latest in a string of espionage charges leveled at China. Officials in Beijing said the claims were unscientific and irresponsible.

All of this will hang over high-level U.S.-China strategic and economic talks in Washington in late June.

“This is the most difficult time I’ve seen in China for multinationals – and I’ve been here close to 30 years,” said James McGregor, the chairman for U.S. public affairs consultancy APCO Worldwide in China.

“I have clients asking me whether they will be welcome here much longer,” he said.

Reporting by Michael Martina and Matthew Miller; Editing by Mark Bendeich

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