May 01, 2011

Foreign Investment Industrial Guidance Catalogue (Revised Draft for Comment)

Issuing Body: National Development and Reform Commission, Ministry of Commerce, and other relevant departments
Issuing Date: April 2, 2011

Responding to a year-old mandate from China's State Council, the National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), and other relevant departments have issued a revised draft of the Foreign Investment Industrial Guidance Catalogue (Foreign Investment Catalogue) for public comment. Last revised in October 2007, the Foreign Investment Catalogue prioritizes industries for foreign investment, and as such plays an important role in shaping economic development and foreign investment policy in China. This latest 2011 draft of the catalogue comes in response to the State Council's April 2010 release of the Several Opinions on Further Utilizing Foreign Capital, which set priorities to encourage foreign investment in research and development centers, high-end manufacturing, high and new technology, alternative energy, and other environmentally friendly industries, while discouraging investment within industries that consume large amounts of energy, pollute the environment, or are already over capacity in China.

The Foreign Investment Catalogue divides domestic industries into three categories: "encouraged," "restricted," and "prohibited." Unlisted industries are deemed to be "permitted," a fourth category that neither enjoys benefits nor is restricted. "Encouraged" industries enjoy benefits such as lower levels of required governmental review, tax breaks, and other financial incentives. Foreign firms involved in restricted industries are subject to greater scrutiny, and at higher levels of government. Since its first release in 1995, the Foreign Investment Catalogue has been updated in 1997, 2002, 2004, and 2007. China Law Update summarized the 2007 revision in our January 2008 issue.

Compared to that 2007 version of the Foreign Investment Catalogue, the proposed 2011 revision calls for a number of key changes:

  • In draft form, the 2011 version adds certain sectors to the "encouraged" category, such as venture capital enterprises, intellectual property services, and the manufacturing of key components of new-energy vehicles (although, in this last case, foreign capital is limited to half the total capital contributed to an entity).
  • The 2011 draft removes certain sectors from the "encouraged" category, including the manufacturing of complete automobiles and the establishment of auto research and development institutions. Those sectors are now "permitted."
  • Under the "restricted" category, the 2011 draft expands limits on the processing of edible oils to include peanut, cottonseed, and tea seed oil in addition to soybean and rapeseed oil. If the revision is enacted in this form, Chinese investors will need to hold a majority interest in all companies within these sectors.
  • The new draft of the Foreign Investment Catalogue removes certain important sectors from the "restricted" category, including medical institutions, financial leasing, and commodity auctions. They too are now "permitted."
  • The 2011 draft increases restrictions on the construction of villas, moving them from the "restricted" category to "prohibited."

The changes in this 2011 revision of the Foreign Investment Catalogue reflect priorities established by the State Council in the Several Opinions on Further Utilizing Foreign Capital, which aims to steer foreign capital to high-end manufacturing, high-tech industries, new technology, service industries, alternative energy, and environmentally friendly industries.

From an industrial perspective, the new-energy vehicles and medical services sectors are two key industries that stand to benefit from the revised draft. Due to existing overcapacity, manufacturing of finished automobiles and the establishment of auto research and development institutions are being downgraded from "encouraged" in the 2007 Foreign Investment Catalogue to "permitted" in the revised draft. In order to promote the development of environmentally friendly vehicles, the revised draft brings the manufacturing of key components of new-energy vehicles into the "encouraged" category, though an equity cap on foreign capital is set at 50 percent. The changes stand to benefit China's development of new-energy vehicles and provide significant opportunities for foreign investors seeking to tap into this sector.

In the 2007 Foreign Investment Catalogue, medical institutions are listed under the "restricted" category and subject to limitations on structure—they must be joint ventures. The 2011 draft removes medical institutions from the "restricted" category and eliminates the limitation to joint ventures. That means foreign investment in medical institutions now belongs under the "permitted" category, and foreign investors may establish wholly foreign-owned medical institutions. This change aligns with the Opinions on Further Encouraging and Guiding Privately Owned Capital to Establish Medical Institutions, which was jointly issued in December 2010 by the NDRC, China's Ministry of Health, MOFCOM, the Ministry of Finance, and the Ministry of Human Resources and Social Security. Those rules called for cancellation of the limitation on equity percentage of foreign capital, and for allowing qualified foreign investors to establish wholly foreign-owned medical institutions on a pilot basis.

Conclusions

The period for public comment on this proposed revision of the Foreign Investment Catalogue ended April 30, 2011. According to a MOFCOM official, the final version of the revised Foreign Investment Catalogue is expected in June or July of this year. China Law Update will follow this development.

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