Quotes of the Day

With his first official visit to China scheduled for this week, U.S. Treasury Secretary Henry Paulson has been at pains to ease frictions between the world's two largest trading partners. Despite its ballooning trade deficit with China and the loss of American manufacturing jobs, the U.S. remains a champion of open markets, Paulson said in a speech last Wednesday, noting: "Protectionist policies do not work and the collateral damage from these policies is high. We will not heed the siren songs of protectionism and isolationism."

China, meanwhile, was sending a very different message. The New China News Agency, known as Xinhua, released details last week of new regulations tightening control over distribution of information by foreign wire services. By forcing news agencies such as Reuters, Bloomberg and the Associated Press to distribute content through?and share revenue with?Xinhua, China was effectively rigging the market to favor its domestic news operation, critics charged?a claim bolstered by the publication of a speech in which Xinhua head Tian Congming said financial news was a "new growth engine" for the agency. Xinhua's power grab was also widely condemned overseas as an attempt to control the foreign media: among other restrictions, the rules prohibit dissemination of news that undermines "the fine cultural traditions of the Chinese nation." Oded Shenkar, a China expert at Ohio State University, says: "With a single move, they transfer a chunk of the highly profitable financial-news business from foreign to domestic hands" and "tighten control over the news ... They manage to kill two birds with one stone."

Countering the critics, China's Premier Wen Jiabao insisted that Beijing "will ensure the freedom and the rights of the foreign news media and foreign financial-information agencies." But alarm bells are nonetheless sounding in foreign boardrooms. In the past few months, Beijing has issued several regulations and is drafting more that appear to be aimed at limiting the ability of overseas firms to do business in China. Last week, China's stock-market regulator temporarily banned investment by foreign brokerages in domestic securities firms, citing the need to allow the local industry to consolidate so that Chinese firms would be large enough to compete with global giants. And in late August, the Ministry of Commerce issued new rules on mergers and acquisitions, including a number of vague provisions that appear to give the ministry wide powers to review and halt mergers. Bob Poole, who heads the Beijing office for the U.S.-China Business Council, says there are good aspects to the changes?for example, they spell out previously unclear procedures for foreign purchases of Chinese companies. But he says some parts of the regulations are "not clear and might be used in a protectionist way."

Poole notes that similarly troubling provisions have been written into rules governing specific sectors in which foreign firms are active: heavy industries, express mail, banking and direct selling. With the five-year compliance period negotiated when China was admitted to the World Trade Organization due to end in a few months, he says it's critical that barriers lowered to gain WTO entry "should not be raised again in the form of technical regulation, industrial policies or other means."

Foreign access to China's huge market has become an incendiary issue on the mainland. Several recent acquisitions of large Chinese firms by foreign companies have been stalled after a storm of public protest over the impact such sales could have on China's economic security. A $375 million bid by the New York-based Carlyle Group for Xugong Group, China's leading construction-machinery manufacturer, has been delayed for 10 months. More recently, Chinese corporate officials and commentators condemned the proposed takeover of China's biggest manufacturer of kitchen goods, Supor Cookware, by the French firm SEB. One critic of such takeovers is the former head of China's National Statistics Administration, Li Deshui, who told a China Daily reporter: "If China lets multinationals' malicious mergers and acquisitions go ahead freely, China can act only as labor in the global supply chain."

Such complaints look set to intensify. Shenkar of Ohio State notes that almost two-thirds of China's exports are generated by companies with foreign investors, a figure that rises to nearly 80% in high-value-added sectors like IT. There was far less foreign involvement in the economies of Korea or Japan at similar stages of growth, he says. "It's a serious weakness and has huge implications for national competitiveness and national security," Shenkar argues. China will have no choice but to use whatever methods it has to "recoup that lost share and build up a stable of companies that can be serious competitors on a global scale." Doing business in China has always been a challenge. For some, it may be about to become next to impossible.

• Simon Elegant | Beijing
• Foreign firms are lining up to invest in China. But Beijing seems increasingly loath to let them in