A new publication by the OECD, the Paris-based research agency of 30 industrial economies, says China would benefit from having more transparent rules governing mergers and acquisitions.

OECD economist Ken Davies says financial data released by state-owned companies in China seldom can be trusted. In addition, he says, prospective foreign investors are discouraged by a complex regulatory framework and restricted access to local capital markets.

Davies is the author of the OECD's 2006 Investment Policy Review of China. Speaking in Washington, the economist said government catalogues listing industries and enterprises where foreign investment is sought have significant shortcomings.

"These catalogues are big. They are unwieldy. They are not transparent. They are interpreted differently by different authorities locally and nationally," he said. "We suggest a very simple solution: scrap them. And if you cannot do that immediately, because that is difficult, at least make the list clear, transparent, and gradually prune it and whittle it down."

China is open to foreign direct investment and in recent years has attracted $60 billion annually, more than any other developing country. But Davies says the Chinese would get much more investment if they adopted Western investment guidelines.

Washington lawyer and investment specialist Yee Wah Chin says China suffers from the absence of the rule of law and capricious regional interpretation of regulations.

"So, you have rampant local protectionism," he said. "You have got local layers of regulation, which does its own thing in many areas regardless of what the central government says. And it affects not just investment but how business conduct themselves, even after they have succeeded in investing." 

Davies says the central government wants foreign investment in China's depressed northeast, where there are many loss-making state enterprises. He suggests that unless the investment guidelines are streamlined, foreign firms may be reluctant to move into northeast China.