China's new Foreign Investment Guidance Catalogue enters into force today
14.4.2015 - Jeffrey Wouters
On 10 March 2015, the Ministry of Commerce ("MOFCOM”) and National Development and Reform Committee ("NDRC”) of China signed order No.22 publishing the Catalogue for the Guidance of Foreign Investment (hereinafter, the "2015 Catalogue”) which will become effective as from 10 April 2015. This 2015 Catalogue lifts many restrictions on foreign investment as compared to the prior version of the catalogue which was released in December 2011 (and which became effective as of 30 January 2012, hereinafter the "2011 Catalogue”) and reflected the then latest China economic restructuring plans and industrial policies.
Below some of the notable changes in the 2015 Catalogue will be highlighted.
Since 1995, China has published the Catalogue for the Guidance of Foreign Investment (the "Foreign Investment Catalogue”) to guide the entrance of foreign investment into China. The Catalogue divides foreign investment into three categories, being (1) encouraged industries, for which the Chinese government is actively seeking foreign investments and for which investors are able to enjoy certain benefits such as tax incentive, cheaper land cost, simplified approval procedures or other favourable investment terms; (2) restricted industries, for which the Chinese government intends to impose restrictions such as foreign shareholding ratio’s, limits on the operation of the company and special approvals; and (3) prohibited industries, in which no foreign investment is allowed. Any industry sectors that are not listed in the Foreign Investment Catalogue are deemed to be "permitted”. The Catalogue also contains rules on foreign ownership restrictions and corporate forms through which an investment must in certain cases be made (typically, an obligation to form an equity or cooperative joint venture).
The Foreign Investment Catalogue is regularly amended (approximately every three years) to reflect the government’s prevailing economic and political policies.
The 2015 Catalogue is lifting many restrictions on foreign investment and, as such, is a reflection of the continuous interest on the part of the Chinese government to continue to attract foreign investments. It also shows the ongoing efforts by Chinese regulators government to continue with structural and far-reaching economic reforms.
2. 2015 Catalogue
2.1 Overview of the 2015 Catalogue
The 2015 Catalogue lists 349 "encouraged”, 38 "restricted” and 36 "prohibited” industries. As compared to the 2011 Catalogue, the "restricted” industry sectors have been significantly reduced from 79 to 38, and the "prohibited” sectors have also been slightly reduced from 38 to 36. The overall trend is therefore clearly towards greater openness and liberalization.
2.2 Encouraged industries category
Under the 2015 Investment Catalogue, the encouraged category has been expanded. Compared to the 2011 Catalogue, the notable amendments are as follows:
- Construction and operation of grids (this still requires a majority shareholding by the Chinese partner): this is newly added into the encouraged category;
- Accounting and auditing：the restrictions are changed from "limited to cooperation or partnership” to "the chief partner must hold the Chinese nationality”;
- Construction and operation of urban subway, light railway and other track transport: the restriction of "Chinese partner with majority shareholding” was removed;
- Senior care institutions: this was newly added into the encouraged category, following a circular issued by MOFCOM and the Ministry of Civil Affairs to encourage foreign investments in for-profit aged care institutions, which reflects the urgent need for senior care facilities in China given the now rapid decline of its workforce;
- The establishment of research and development centres for new and advanced technology and incubators are still within the encouraged category. This is in line with the technology oriented policies currently implemented by the Chinese government in an attempt to further close the gap with the developed world and to avoid the middle-income country trap.
2.3 Restricted industries category
As mentioned above, the restricted category has seen most of the liberalization in the 2015 Catalogue. Most of the liberalized industries lie in the manufacturing sector, while some others in sectors such as service, agriculture and infrastructure. For most of these industries, the 2015 Catalogue marks the permission of foreign investment with no special restrictions.
Compared to the 2011 Catalogue, some particular changes in the restricted category under the 2015 Catalogue are summarized as follows:
- The industries of chemicals manufacturing (such as calcined soda) and eneral apparatus manufacturing (such as various types of po-grade bearings and their components) were removed from the restricted category, which means they are now permitted for foreign investment with no special restrictions;
- other manufacturing industries were also removed from the restricted category, such as medicine manufacturing, but excluding arms and ammunition manufacturing (which remains "prohibited”)”;
- the manufacturing of whole units of automobile, special automobiles and motorcycles (Chinese shareholding not less than 50%, and the same foreign investor can establish less than (including) two joint ventures to produce the same type of whole units of automobile, the afore-mentioned restrictions on two joint ventures do not apply in case of merger of other domestic automobile manufacturing enterprises with Chinese joint ventures) were newly added into the restricted category;
- E-commerce for technology, media and telecommunications business (TMT) were removed from the restricted category, but other value-added and basic TMT businesses remain in the restricted category and subject to 50 percent or more Chinese shareholding requirement;
- development of tracts of land, construction and operation of high-class hotels, high-class office buildings and international exhibition centers, investment in real estate secondary market and real estate brokerage were removed from the restricted category;
- Finally, it is worth noting that in the 2011 Catalogue, banks, non-bank financial institutions, trust companies, and currency brokerage companies were listed in the restricted category. In the 2015 Category, only banks still remain in the "restricted” category and subject to restrictions such as, the shareholding in one single Chinese commercial bank by a single foreign financial institution or any affiliate controlled or jointly controlled by it (either acting as a promotor or strategy investor), shall not exceed 20% (etc.).
2.4 Prohibited industries category
Although the total number of prohibited industries has been reduced in the 2015 Catalogue, new prohibited industries have nevertheless been added into the list, including the following:
- The wholesale and retail of tobacco (this was considered a restricted industry in the 2011 Catalogue);
- Production of genetically modified plant seeds;
- Processing and production of nuclear fuel;
- The consultancy on Chinese legal issues (except for providing information about the impact of Chinese legal environment) – accordingly, the market for foreign law firms is still very much closed in China, and this notwithstanding the proliferation of non-Chinese firms in the PRC and recent initiatives in the Shanghai FTZ to allow for joint ventures between Chinese and foreign firms;
- Online publishing services;
- Construction of golf courses and villas (but note that the operation of golf courses and villas is not prohibited, and shall be deemed as permitted).
The slowdown in China’s economy from double-digit growth to a slightly less baffling but probably more sustainable and still very impressive 7% has been widely reported and we will not venture into further detail on it here.
However, it is worth noting that the New Catalogue comes at a moment when ever more queries are being raised internationally about the future of the China growth model and how to integrate China’s economy further into the world economy, also within the PRC.
Clearly, the New Catalogue fits in the broader trend of more liberalization, more openness, and less restrictions for foreign investors, all of which should have a welcome effect on the real and perceived investment climate in China and therefore contribute to ongoing economic growth and the development of new, more advanced industries, even though much work remains to be done, especially in the services sector.
The general trend is positive, however, and this is further supported by the fairly transparent manner in which Chinese regulators have been communicating about the forthcoming changes. A first draft of the New Catalogue was released in November 2014 with the explicit request for public comments. Only about two dozen changes made it to the final version (and it is at this stage unclear whether this is for lack of public response or for lack of regulatory answering to these responses), but at the very least the request for public comments can be seen as a regulatory attempt to more fully engage with the relevant stakeholders.
Finally, China is working on a new version of the PRC Foreign Investment Law (hereinafter, "Draft” or "Draft Foreign Investment Law”), a first draft of which was published for public consultation on 19 January 2015 (the consultation ended on 17 February 2015).
The Draft Foreign Investment Law, if passed, may replace and reconcile the three fundamental foreign investment laws, namely, the PRC Wholly Foreign-owned Enterprise Law (amended in 2000), the PRC Sino-Foreign Cooperative Joint Venture Law (amended in 2000), and PRC Sino-Foreign Equity Joint Venture Law (amended in 2001), and form a new legal framework for foreign investment.
Furthermore, Draft Foreign Investment Law may introduce a "special administrative measure list” (more colloquially known as the "negative list”) to replace the then-existing version Foreign Investment Catalogue, which would essentially result in all foreign invested companies being only subject to reporting obligations instead of the current pre-approval procedures, except for those explicitly listed in a negative list.
In other words, a further cataclysmal change may be on its way whereby only restricted and prohibited industries would still be subject to ex ante regulation. At this stage, however, it is too early to predict the impact thereof on the New Catalogue. For now, we can suffice by concluding that the New Catalogue will facilitate foreign investments in a substantial number of industries (especially in manufacturing but less so in services), that its genesis shows signs of a certain willingness on the part of Chinese regulators to exchange views with stakeholders, and that the wider trend is for China to continue to lower barriers to entry and to open up its market.