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To be fair, the new great wall may simply be a reaction to years of remarkable openness. After Deng Xiaoping gave the world access to China in the early 1980s, restrictions on foreign companies were steadily reduced. That process accelerated after China joined the World Trade Organization in 2001, as Beijing welcomed companies bearing capital, jobs and technology. International firms responded by pouring more than $710 billion in direct investment into the country, according to the U.N. Conference on Trade and Development. In recent years, China's national priorities have shifted: it has plenty of local capital and wants to build homegrown brands--"national champions"--and nurture its own high-tech industries. "The line [in Beijing] is that the government had been pushed by foreigners to go too far too fast" on liberalization, says Derek Scissors, an expert on China at the Heritage Foundation.
Beijing is pushing back. The current leadership, under President Hu Jintao, has proved retrograde on economic issues, expanding the power of state-owned enterprises and allowing reform to stall. "I don't think there have been commercially significant market-opening measures in the past five years," says Christian Murck, president of the American Chamber of Commerce (AmCham) in China.
The consequence is that foreign businesses find themselves tangled in red tape while their local competitors speed ahead. Across industries, 68% of companies responding to an AmCham survey released in March said government licensing requirements are slowing their expansion in China, while a mere 22% believe licenses are given to foreign and Chinese companies on equal terms.
In the financial sector, multiple bureaucratic hurdles have already stymied progress. Despite an expanding network of branches, foreign banks command less than 2% of national banking assets, in part because of a complex and time-consuming regulatory process to gain government approval to open branches or launch new products. International insurance companies "continue to face barriers to market entry and expansion," according to an April report from AmCham in China, because local outfits "continue to enjoy regulatory favor ... enabling them to benefit at the expense of foreign-invested insurers." The report notes that foreign insurers routinely face lengthy delays in receiving permits to open branches and other necessary licenses. As a result, their market share has been steadily declining, to 3.1% in 2011 from 6% in 2004.
Small businesses aren't immune from the bureaucracy's hassles either. Claudia Masger, a Swiss entrepreneur, launched her first company in China, wine importer MQ Wines, in 2008. When she tried to open a chain of shops called Cheers to sell the wine, she found that the paperwork needed to start a firm had increased in volume and become more complicated. She even had to take an online exam on doing business in China--in Chinese. Customs regulations, she says, have been changing more erratically, making it extra time-consuming to get her product into the country. Of the 70 people she employs at her two firms, three manage affairs with the bureaucracy. "The biggest problems we have are always government-related," she says.