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Focus: China amends its foreign investment catalogue

22 February 2012

In brief: New opportunities to establish or invest in a business in China may be opened up following the Chinese Government's release of its amended Foreign Investment Industrial Guidance Catalogue. The new Catalogue took effect on 30 January 2012 and presents an interesting picture of China's economic focus for the next several years. Special Counsel Ross Keene , Senior Associate Adrian Fisher and PRC Consultant Crystal Zhang report.

How does it affect you?

  • In line with the objectives of China's 12th Five Year Plan, the new Catalogue encourages foreign investment in energy saving and environmental protection, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, new materials, and renewable energy vehicles.
  • The new Catalogue opens up foreign investment in a number of specific business types, including pharmaceutical distribution, online music streaming, venture capital, finance leasing, IPv6 systems, importation of books, newspapers and magazines, electric car components and charging stations, and environmental clean-up operations and equipment manufacture.
  • If your business operates, or is interested, in one of these sectors, the new Catalogue may present new opportunities to establish or invest in a business in China.

Background

Foreign investment in China is subject to the Foreign Investment Industrial Guidance Catalogue (the Catalogue). The first Catalogue was promulgated in 1995 and this is the fifth revision. The Catalogue categorises foreign investment in particular industries in China as either 'encouraged', 'restricted' or 'prohibited'. If an industry is not specifically referred to in the Catalogue, then investment in that industry is considered to be 'permitted'.

If an industry is categorised as prohibited, then no approvals for foreign investment will be granted. The key implications of falling into one of the other three categories (encouraged, restricted or permitted) are as follows.

  • If the project is encouraged or permitted, then, provided the required documents are submitted and those documents are in order, and the proper procedures are followed, the approval process should be reasonably straightforward and the authorities can generally be expected to approve the project. Only investments worth more than US$300 million require State-level Ministry of Commerce (MOC) and/or National Development and Reform Commission (NDRC) approval. Lower-valued investments require local approval only. The significance of an investment being encouraged is that such investment may attract tax subsidies and other preferential treatment.
  • By contrast, if the project is in the restricted category, State-level MOC and/or NDRC approval will be required if the value of the investment is greater than US$50 million. Regardless of the level at which the application is made, the MOC and/or the NDRC may delay, suspend or withhold their approval for the project at their sole discretion.

Projects in the industries set out in the Catalogue can be wholly foreign-invested, unless the Catalogue specifies otherwise. In some cases, the Catalogue will require that a Chinese party has a controlling stake or that the project be by way of a Sino-foreign equity or cooperative joint venture. Such restrictions are imposed not only on investments in restricted industries, but also with respect to a number of encouraged industries. If an industry is not referred to in the Catalogue (and so is permitted), then generally such a project can be wholly foreign-owned.

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Aims of the 2012 Amendments to the Catalogue

The Government's stated aims in relation to the amendments to the Catalogue include:

  • Gradual opening: The new Catalogue continues a trend of slowly opening up China's economy to foreign investment, principally in those areas that are a focus of China's economic and social development policies. Accordingly, some industries previously listed as restricted or prohibited have been removed from those categories, and some new industries have been added to the encouraged category. In addition, restrictions on the permitted level of foreign ownership and control have been removed in some industries.
  • Focus on strategic industries: China's 12th Five Year Plan (approved in March 2011) identifies the following seven focus industries for the period of 2011 to 2015, called 'strategic emerging industries': energy saving and environmental protection, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, new materials, and renewable energy vehicles. Many of the changes to the Catalogue are aimed at making foreign investment in these industries easier.
  • Promoting the development of less developed regions: One important focus of China's 12th Five Year Plan is to rebalance social and economic inequalities that exist between China's booming eastern and southern cities and the less developed western, central and northeastern regions. In order to promote this objective and encourage the economic growth of China's less developed regions, the Chinese Government has signalled that foreign investment in certain industries (particularly labour-intensive industries) will be opened up in these regions of China. A new version of the Central and Western Region Foreign Investment Preferred Industries Catalogue is expected to be released next year.

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Highlights of the 2012 Amendments to the Catalogue

Some key changes made in the new version of the Catalogue are as follows:

  • Pharmaceuticals / healthcare
    • Foreign investment in pharmaceutical distribution businesses has been moved from the restricted category to the permitted category. This reflects the gradual easing of restrictions on foreign investment in pharmaceutical distribution in recent years.
    • Investment in medical institutions has been removed from the restricted list, and so is now permitted.
    • Investment in manufacturing of certain vaccines, particularly vaccines for cervical carcinoma, malaria and hand, foot and mouth disease, is now encouraged.
    • Investment in the production of non-self-destructible disposable syringes, blood transfusion apparatus and blood bags is now permitted (previously this was restricted).
  • Manufacturing / industrial
    • Investment in a variety of areas of manufacture (particularly in the green and high technology industries) is now encouraged; for example:
      • equipment for the clean-up of oil spills;
      • water purification, treatment and recycling, and water quality monitoring equipment;
      • key components and parts for green vehicles (eg high-energy batteries and other power and charging systems for electric cars); and
      • touch screens and touch control systems.
    • Investment in the construction and operation of renewable water plants and electric car charging stations is also now encouraged.
  • Technology
    • Investment in the development and manufacture of next-generation Internet system equipment and software based on IPv6 has been added to the encouraged category.
    • Foreign investment in the manufacture of next-generation communications equipment, including high-speed TDM equipment, DWDM equipment, broadband network equipment and DSL equipment has also been added to the encouraged category.
  • Media
    • Distribution and importation of books, newspapers and periodicals, and the importation of audio-visual products and electronic publications, have been removed from the prohibited category. (NB: Distribution of audio-visual products is still listed as restricted and investment must be by way of Sino-foreign equity joint venture with a Chinese party having a controlling share.)
    • Music has been excluded from the prohibition on what the Catalogue calls 'the operation of Internet cultural business', which is effectively the operation of websites or the provision of information over the Internet in China. Accordingly, foreign investment in the booming online music streaming industry is now permitted.
  • Services and education
    • Investment in, and establishment of, the following businesses is now encouraged:
      • venture capital firms;
      • intellectual property rights services; and
      • vocational skills training.
    • Investment in finance leasing companies is now permitted (previously it was restricted).
    • Franchising has been removed from the restricted category, so foreign investment in, and operation of, franchises is now permitted (although franchising remains subject to other strict regulations).
  • Energy and resources
    • Investment in the exploration and mining of lithium and sulfurous iron ore, and the extraction of brine resources from salt lakes, is now restricted.
    • Foreign exploration and mining of high alumina fireclay, wollastonite and graphite is now restricted.
  • Property / logistics
    • Investment in the construction and operation of villas has been moved from the restricted to the prohibited category.
    • 'Modern logistics' is still in the encouraged category, although the concept is now more broadly defined.
    • Foreign investment in the construction and operation of pallet and container unit sharing systems is now encouraged.
  • Agriculture
    • Foreign investment in the production of natural food additives and food ingredients is still encouraged but can now be through wholly owned companies rather than being limited to Sino-foreign joint ventures.

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Conclusion

The changes made in the new version of the Catalogue reflect China's commitment to developing those industries identified as 'strategic emerging industries' in its 12th Five Year Plan by opening up to foreign investment a variety of businesses in the manufacturing, environmental and high-tech industries. It is important to note, however, that even if an investment is encouraged or permitted under the Catalogue, foreign investors will still need to be aware of the required approvals and potential regulatory restrictions for their particular investment. Although it remains to be seen how the changes to the new Catalogue will be implemented in practice, it is clear that the new Catalogue presents significant new opportunities for foreign investors in certain industries.

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