Daimler and BMW Can Show If China’s Barriers Are Really Falling

(Bloomberg) -- Daimler AG's plan to take control of its China joint venture opens another crack in China's blockade of foreign ownership and puts the nation's giant auto industry in the spotlight for whether promised reforms will bring real change.

The German maker of Mercedes-Benz cars is said to want to take majority control of a Chinese affiliate, following a similar move in October by rival BMW AG. A year ago, those announcements would have been unthinkable, but after years of stalling, Beijing has raised hopes of change by granting foreign banks, carmakers and fund managers better access to the world's largest pool of consumers. Health care and education could follow.

Hopes for real changes were kindled in January when Chinese Vice Premier Liu He -- President Xi Jinping's top economic aide -- promised global business leaders in Davos, Switzerland, that 2018 would be a pivotal year for reform. But even with rising trade tensions and renewed accusations from the U.S. of forced technology transfer and intellectual property theft, many remain skeptical as to how far China can go in allowing competition in without destabilizing debt-laden domestic companies.

“China will speed up its opening up and reform agenda but even so, it can't meet the expectations foreign investors have after hearing Chinese leaders' promises,” said Wang Dan, an analyst at the Economist Intelligence Unit in Beijing. “As a developing country, China still faces lots of domestic challenges, which makes it impossible to open up crucial areas completely.”

Trade Pressure

China is under pressure from the U.S. to wind back its $423 billion goods trade surplus with the world, improve market access and curb government support for state-owned enterprises. In addition to appeasing trade partners, a more open economy could improve the quality and technology of its domestic industry and attract foreign investment.

In April, China eased the rules around automotive ventures after decades of restricting foreign car companies to a maximum stake of 50 percent with a local partner. BMW was the first to take advantage of the change, announcing it would own a majority holding in its venture with Brilliance China Automotive Holding Ltd. in 2022. Daimler is in discussions with state-owned partner BAIC Motor Corp. to boost its joint venture stake to least 65 percent from 49 percent, people familiar with the matter said this week.

In financial services, international banks like Switzerland's UBS Group AG and JPMorgan Chase & Co. of the U.S. have moved closer to acquiring majority stakes in local joint ventures after China loosened rules for the $45 trillion industry a year ago. BlackRock Inc. is considering seeking a mutual-funds license in China, people with knowledge of the matter said last month.

While Vice Premier Liu's Davos statement promised some reforms would “exceed the expectations of the international community,” many remain skeptical over how far China will open up. Many industries are still closed entirely and others have obstacles that aren't showing signs of subsiding.

Other Barriers

Even if it eases ownership restrictions, there are other ways in which the country keeps out foreign competition, said Mats Harborn, president of the European Union Chamber of Commerce in China. The country also uses other barriers to doing business, such as the granting of licenses, he said on his organization's website. International investors in credit-card services in China have yet to receive licenses to offer them, six years after technically allowed to enter the business, he said.

China ranks 59th out of the 62 countries evaluated by the Organization for Economic Cooperation and Development in terms of openness to foreign direct investment. Almost half of companies surveyed in June by the chamber of commerce said they missed out on business opportunities due to regulatory barriers or market access restrictions, and they expect such regulatory obstacles to increase during the next five years.

Companies are also waiting for simplified rules on investment in China. The “negative list,” which specifies the areas of the economy that are off-limits to foreign companies, was shortened in June and will become the only standard for deciding where foreigners can invest from March. Government agencies have started to screen and clean up regulations that include restrictions on foreign investments, Economic Information Daily reported Thursday, citing Commerce Ministry spokesman Gao Feng.

“For the party, the priority is to remain stable and build confidence while taking mild reform actions,” said Wang. “China will open up more but will not loosen its grip.”

To contact Bloomberg News staff for this story: Ville Heiskanen in Singapore at vheiskanen@bloomberg.net;Dandan Li in Beijing at dli395@bloomberg.net

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Adam Majendie

©2018 Bloomberg L.P.

With assistance from Editorial Board