On 1 April 2011, the Legislative Affairs Office of the State Council published a notice soliciting comments from the public on a proposed revised version of the PRC Catalogue of Industries for Guiding Foreign Investment (the Investment Catalogue). This update to the Investment Catalogue has been anticipated since the publication in 2010 of the State Council's Opinions on the further utilisation of Foreign Investment, which set new goals for the development and further liberalisation of foreign investment in China.
First published in 1995, the Investment Catalogue has witnessed the quick development of China and the progressive opening of the country to foreign investment. It is the principal policy document regarding investment by foreign companies in China, and it sets out in great detail the industrial sectors where foreign investment is (i) encouraged, (ii) restricted, or (iii) prohibited. Industrial sectors not listed in the Investment Catalogue are generally considered to be "permitted", i.e. fully open to foreign investment but not benefiting from specific advantages.
Newly encouraged activities
The proposed revised version of the Investment Catalogue (the 2011 Draft Catalogue) is largely inspired by the recently approved 12th Five-Year Plan of the PRC. As a consequence, the 2011 Draft Catalogue focuses on the sectors highlighted in the plan, and the following activities have been included in the "encouraged" category:
Environmental services and equipment
- Offshore oil pollution cleaning, seawater and coastal zones cleaning
- Recycling of plastics, textiles, tires, electrical and mechanical waste
- Restoration of mines / reuse of mine tailings
- Recycling of building waste
- Energy conservation building materials
- Coal liquefaction
- Special batteries technology
- Concentrated solar power film
- Wind turbine bearings and gearboxes
- New energy vehicles and their components
- Pumped-storage hydroelectricity equipment
High-technology equipment and materials
- Special glass products
- Special crystals
- Special textiles
- New materials (for aerospace and aviation)
- Hi-tech vehicles components
- Touch control systems
- Hi-tech network equipment
- 10MP+ digital cameras
- High definition video cameras
- New vaccines
- Medical institutions
- Advanced medical equipment
- Distribution of live and fresh agricultural products
- Agricultural chain distribution
- Hi-tech agricultural machinery
The 2011 Draft Catalogue also lifts a ban on a number of activities which were previously restricted or prohibited. Such liberalised sectors include:
Import and distribution of printed publications and audiovisual products (including movies)
The liberalisation of this sector is mainly in reaction to a 2010 WTO ruling which required China to amend its legislation to allow foreign players to import and distribute publications and audiovisual products. As sector-specific regulations are still in place, the full liberalisation may be slightly delayed, and China will miss the implementation deadline for the WTO ruling by a few months. Nevertheless, this update to the Catalogue announces more profound changes to this sector which will be welcomed by foreign publishers and movie producers.
Under the current Investment Catalogue, investment in automobile manufacturing is limited to 50/50 joint ventures with Chinese partners. Under the 2011 Draft Catalogue, the manufacturing of complete vehicles is no longer listed as a "restricted" sector. While it is still quite early to understand the full significance of the change (and in particular whether the 50/50 ban will be lifted), there is a possibility that it would allow foreign car manufacturers to (i) establish wholly foreign-owned car manufacturing companies or (ii) even buy-out their current Chinese partner. Similarly, the distribution and retail of automobiles is no longer restricted, and foreign players could theoretically acquire domestic distributors and establish wholly-owned distribution and dealership networks. As in the previous case, sector-specific regulations will need to be amended to implement this change, and the final extent of the liberalisation may only be known after new implementing regulations have been issued.
Strictly controlled since the first version of the Investment Catalogue, and progressively liberalised thereafter, the carbonated beverages industry has now been removed from the "restricted" category, suggesting that foreign carbonated beverages manufacturers will be able to set up wholly-owned bottling operations in China.
Already announced in sector specific regulations earlier this year, the full liberalisation of foreign investment in medical institutions (clinics and hospitals) is confirmed by the 2011 Draft Catalogue, paving the way for 100% foreign-owned hospitals in China.
Unfortunately, the 2011 Draft Catalogue may fall short of some foreign investors' expectations, as a number of restricted sectors remain largely untouched, in particular the banking and insurance sectors, which remain subject to the existing severe limitations under their respective sector-specific regulations. In addition, in an unexpected move, the 2011 Draft Catalogue has established new prohibitions on domestic courier services and the construction and operation of villa developments.
Finally, in stark contrast to earlier versions of the Foreign Investment Catalogue, the 2011 Draft Catalogue has included final provisions clarifying that sector-specific regulations shall prevail over the provisions of the Investment Catalogue, thus limiting the role of the Investment Catalogue as a policymaking instrument. Hopefully this provision will be removed from the final version of the document.
As mentioned at the beginning of this briefing, the 2011 Draft Catalogue has been released as a draft for comments, and interested parties should liaise with the contact persons set out in the document to provide their suggestions and recommendations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.