With opaque laws, questionable court rulings and campaigns against multinational companies, doing business in China is not seen as easy for foreign investors.
But an ongoing debate has thrown a spotlight on the attitude of the foreign investment community, with some calling for clearer rules and others who stress the need to tolerate an uncertain environment because of the potential rewards on offer.
And reform on the surface may not result in meaningful change, some claim. Investors have questioned, for example, whether a resolution of Stock Connect's beneficial ownership issue would prevent court rulings being biased against foreign investors.
High-profile foreign companies operating in China have for the past year been targeted by Beijing for anti-competitive behaviour, with Microsoft, Mercedes and Audi having been hit with legal action. Many companies decided not to fight the rulings and fines made against them.
But while the question of beneficial ownership has to an extent been resolved, encouraging some foreign funds - such as those domiciled and regulated by Luxembourg - to tap into Stock Connect scheme, Asian market players seem to have downplayed the risks of a lack of judicial independence.
“China is still such an exciting market that you can have all the hang-ups in the world and watch by the poolside and basically miss the boat," said one Hong Kong-based legal counsel for a US fund house. The counsel added that investors have generally not focused on the realities they face when taking legal action against a mainland China-listed company.
Regardless, he takes the view that with China looking to attract more international investors, companies will have to improve their corporate governance and market rules will need to be modernised.
Others take a similar view, with one custodian pointing out that this is the reality of investing into China: “If you can’t overcome the [sometimes uncertain] reality of PRC law, you may want to stay out.
“When you invest into China, you are subject to PRC law. People could take some comfort in knowing that those investing through the [qualified foreign institutional investor schemes] haven’t raised many legal challenges from foreign investors.”
Indeed, if there is such a problem with the company’s operations, “a fund manager could just sell off a company’s shares before you see any risks. The outcome to pursuing legal action may not materialise into anything,” the custodian added.
But the hypothetical question of confronting Chinese law could in itself be jumping the gun. As one broker points out, technical questions of beneficial ownership have yet to be fully resolved in the eyes of some foreign investors.
Hong Kong Exchanges and Clearing has agreed to provide assistance for foreign investors facing legal action in China, such as by producing certificates to prove to courts that the beneficial ownership of a Chinese company belongs to them. However, the question is whether the China Securities Regulatory Commission and the Chinese courts will recognise them, one broker said.
“What we are missing is some statement from the CSRC to recognise these certificates. The HKEx has probably made half of the overall effort so far to fully resolve this issue,” said the broker, noting that the financial institution he works for is itself currently lobbying the Chinese government to release some circulars to confirm acceptance of the certificates.
But if foreign investors do look into suing a Chinese company, one market participant suggested it could be done by forcing HKEx to take action on behalf of investors, although this could be beyond its remit.
“For me, I think a foreign individual investor who takes direct right of action against a Chinese company is not very smart. There is always a risk that you’re a foreigner against a Chinese company, you’re not in good shape,” said the source.
“Individually, no investor is going to have a lot of influence in China. But as HKEx is a nominee holder and represents multiple beneficial owners and if you were to take legal actions, don’t you think that is going to take up more weight in China?”