February 24, 2012

Foreign Investment Industrial Guidance Catalogue

Issuing Body: National Development and Reform Committee and Ministry of Commerce
Issuing Date: December 24, 2011
Effective Date: January 30, 2012

The National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") have together issued a key document aimed at steering foreign investment in China towards industries sanctioned by the State Council. The two agencies jointly issued the latest version of the Foreign Investment Industrial Guidance Catalogue ("2011 Foreign Investment Catalogue") on December 24, 2011. By declaring some investments to be "encouraged" while others are "restricted" or "prohibited," the catalogue aims to direct foreign capital to high-end manufacturing, high-tech industries, new technology, service industries, alternative energy, and environmentally friendly industries. The catalogue took effect on January 30, 2012.

A draft version of the 2011 Foreign Investment Catalogue was released for public comment last April and summarized in the May 2011 issue of China Law Update. Most of the changes in the final version are minor clarifications of industry descriptions.

Background

China published the first version of the Foreign Investment Catalogue in 1995; updated versions were released in 1997, 2002, 2004, and 2007. China Law Update summarized the 2007 revision in our January 2008 issue.

Like its predecessors, the 2011 Foreign Investment Catalogue divides numerous industries, for the purpose of foreign investment, into three categories: "encouraged," "restricted," and "prohibited." Businesses in "encouraged" industries enjoy benefits such as lower levels of required governmental review, tax breaks, and other financial incentives. Foreign firms that are involved in restricted industries are subject to greater scrutiny, at higher levels of government. Unlisted industries are deemed to be "permitted," a fourth category that neither enjoys benefits nor is restricted.

The changes in the 2011 catalogue since 2007 reflect priorities established by the State Council in the Several Opinions on Further Utilizing Foreign Capital, which was issued in April 2010. (See the May 2010 issue of China Law Update.) In that document, the State Council aimed 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.

Key Elements of the 2011 Catalogue

Compared to the 2007 catalogue, the 2011 catalogue opens some industries to foreign investment, and eliminates restrictions on foreign ownership in others.

New-energy vehicles and medical service sectors, for example, are two key industries that stand to benefit from the changes in the 2011 catalogue. In order to promote the development of environmentally friendly vehicles, the 2011 catalogue 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. Such changes stand to benefit China's development of new-energy vehicles and provide significant opportunities for foreign investors. In addition, the 2011 catalogue removes medical institutions from the "restricted" category and eliminates a requirement for foreign investment to be in the form of joint ventures. Foreign investments in medical institutions now come under the "permitted" category, and foreign investors may establish wholly foreign-owned medical institutions.

Other key changes incorporated in the 2011 catalogue are summarized below:

  • The 2011 catalogue adds certain other sectors to the "encouraged" category, including venture capital enterprises, intellectual property services, the manufacturing of key components of new-energy vehicles (albeit with limits on foreign capital to half of total capital), the manufacturing of Internet system equipment, and professional skills training.
  • Within the "encouraged" category, the 2011 catalogue removes restrictions on foreign ownership in such industries as the manufacturing of equipment for electricity generation using new sources of energy and the production of natural food additives and food ingredients.
  • The 2011 catalogue 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."
  • The 2011 catalogue removes certain important sectors from the "restricted" category, including medical institutions, financial leasing, commodity auctions, the production of carbonated soft drinks, and importing and distribution of books, newspapers, and magazines. They are now "permitted."
  • The 2011 catalogue adds certain industries to the "restricted" category, such as the processing of rice and flour and the construction and operation of large-scale wholesale agricultural markets. The 2011 Foreign Investment Catalogue also expands limits on the processing of edible oils to include peanut, cottonseed, and tea seed oil in addition to soybean and rapeseed oil. Chinese investors need to hold a majority interest in all companies within such sectors.
  • The 2011 catalogue increases restrictions on the construction of villas, moving them from "restricted" to "prohibited." It also increases restrictions on domestic mail delivery services, moving them from "permitted" to "prohibited." Foreign investors are likewise banned from research and development of genetically modified organisms.

Conclusion

The changes incorporated in the 2011 Foreign Investment Catalogue since 2007 reflect priorities established by China's State Council. Although the catalogue is essentially only a series of lists, it is an important document that reflects and implements economic development and foreign investment policies in China. Potential foreign investors should be sure to check the new catalogue and relevant policies prior to investing in China. Existing foreign investors, meanwhile, also need to review the 2011 catalogue to make sure their future business plans and decisions comply with policies now in effect.

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