China's increasingly liberalized home market buoys investment potential from abroad

China has become an important investor in Europe, with interests in the region ranging from Weetabix and PizzaExpress to Energias de Portugal and Telecom Italia. At the same time, as the fragile economic recovery slows investment in Europe and with many fast-growing emerging markets still perceived as high risk, European investors are increasingly looking to China.

The country's rapid graduation from a high-growth emerging economy to a powerful global player has been among the most remarkable economic phenomena of recent times. And China's own formidable growth, together with its regulatory and policy evolution, has enabled an increasingly mature and stable economy to emerge.

As a result, the country is now a compelling destination for European capital. And with foreign direct investment into China set to rise from 667 billion pounds ($1 trillion; 893 billion euros) in 2014 to 1.3 trillion pounds in 2020, according to King & Wood Mallesons' latest research, the size of the opportunity is significant.

But a complex regulatory environment and China's reputation as an opaque market still leave many potential investors unsure of how to pursue these opportunities.

China's increasingly liberalized home market has buoyed investment potential, and has entered a "structured economic slowdown". There has been a notable shift away from state-led investment and export-oriented manufacturing. The government is looking to domestic consumption and high-end goods and services to drive growth and respond to rising incomes, rapid urbanization and changing consumer preferences - using FDI as a critical driver of economic advancement.

China's private sector is also set to grow, now accounting for 60 percent of GDP, meaning that there will likely be greater opportunities to make inward investment feasible.

With an expanding home-market and high demand for government resources, China's policy and investor framework has sought to encourage, guide and control foreign investment. This is reflected in the 12th Five-Year Plan (2011-15), Catalog for the Guidance of Foreign Investment Industries, and in the establishment of new free trade zones. These measures highlight the wider direction of the economy and particular sectors the government has identified as benefiting from outside contributions.

The current Five-Year Plan demonstrates the government's commitment to attracting FDI by encouraging domestic consumption and liberalizing key industries. This commitment is underpinned by the current CGFII, which encourages inward contributions in 350 of 467 investment types, and is the most pro-business to date.

This approach was bolstered by the recent announcement of a new set of draft FDI laws aiming to further free up constraints on foreign firms by scrapping restrictive controls around investment. Premier Li Keqiang gave a keynote speech at the World Economic Forum in Davos that stressed China's commitment to growth and innovation.

With this in mind, enterprising investors can gain entry into some of China's key sectors by 2020. According to our research, FDI into financial services will increase by 417 percent to 143.2 billion pounds in 2020. The life sciences sector will also offer significant opportunities to investors - FDI is expected to climb by 177 percent to 128.2 billion pounds. Similarly, the energy sector is set to welcome 19.3 billion pounds of investment by 2020 as the government focuses on green growth.

Even in the highly regulated media and entertainment sector, there are opportunities for investors - FDI is set to increase from 3.2 billion pounds in 2014 to 6.3 billion pounds in 2020.

Europe's significance is set to climb over the next six years, especially if the European Union and China learn to work through trade disputes and are able to successfully negotiate a bilateral investment treaty. Germany, the Netherlands, the United Kingdom and France will all increase their share of inward FDI by 2020.

But European nations make up only a fraction of total inward investment and no single European country ranks in the top five of inward investors. There are significant opportunities for the region to expand interests in China over the coming years by actively pursuing FDI.

The UK in particular will benefit from China's evolving regulatory landscape. The UK's share of FDI into China will almost double from 1 percent to 1.97 percent. With an economy predicted to grow at a faster rate than the eurozone average, the UK will increase its investment capacity relative to other European states.

The internationalization of the yuan will also induce FDI, while the UK is uniquely placed to capitalize on it given the strength of its financial services industry.

It is an exciting new era in the relationship between China and Europe. Those investors with the right knowledge and a solid understanding of the regulations and cultural practices in the country will reap the rewards of the extraordinary expansion and opening that is in motion.

The author is a partner in corporate practice at King & Wood Mallesons. The views do not necessarily reflect those of China Daily.

( China Daily European Weekly 01/30/2015 page9)