Recent changes in China's legal regime will make it easier for foreign investors to access China's markets. The starting point for any foreign investor interested in participating in the Chinese market is the Catalogue of Industries Guiding Foreign Investment (the "Catalogue"). The Catalogue provides the underlying legal basis for all foreign investment in China, and regulates the scope of foreign investment in different sectors of the Chinese economy. The Catalogue is jointly promulgated by the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM"), China's governing bodies on economic development and trade and investment policy, respectively.
Successive editions of the Catalogue are issued by China as policies towards foreign investment evolve. Foreign investors need to be aware of the changes contained in a new Catalogue when making their investment decisions. The preceding Catalogue was issued in 2007, and on December 24, 2011, a new Catalogue (the "2011 Catalogue") was introduced, effective January 30, 2012.1 Compared to the 2007 Catalogue, the 2011 Catalogue provides foreign investors with access to additional markets within a wider range of industries, and features an emphasis on advanced technology, new energy resources, and professional services.2
Categories of Investment
In the Catalogue, industries in China are divided into four categories with respect to foreign investment: (1) encouraged, (2) permitted, (3) restricted, and (4) prohibited. The contents of the "encouraged," "restricted," and "prohibited" sectors are all explicitly defined, and any remaining undefined industrial sectors fall automatically into the "permitted" category. Industries in "encouraged" and "permitted" categories enjoy simplified approval procedures and favorable tax treatment, while "restricted" and "prohibited" industries are subject to more onerous approval requirements and a higher level of government scrutiny.
It should be noted that the Catalogue may limit the types of investment vehicles a foreign investor can use in certain industries, even for those that are "encouraged." For example, although two industries may both be categorized as "encouraged," one may only permit foreign investment through a joint venture, while the other may allow foreign investment through other means such as the creation of a wholly foreign-owned enterprise.
New Categories of "Encouraged" Industries
Reflecting the Chinese government's growing desire to broaden its economic focus beyond the traditional emphasis on heavy industry, the 2011 Catalogue dramatically increases the number of service industries found in the "encouraged" category. New service industries added include venture capital enterprises, intellectual property services, electric vehicle charging stations, and vocational education and training, among others.
New Technology or Technologically-Advanced Products in Traditional Industries:
The 2011 Catalogue encourages investment in emerging industries such as information technology, high technology equipment, new materials, and new energy resources. For example, manufacturing key parts for new-energy automobiles is now "encouraged." Investments in recycling technology for electrical products, electromechanical equipment, and batteries are also "encouraged." The exploration and exploitation of new energy resources like shale gas is now "encouraged," provided that the foreign investor forms a joint venture with Chinese partners.
China also seeks increased foreign investment in technology research and development industries in order spur innovation in traditional heavy industries such as textiles, chemicals, and machine manufacturing. For example, while the 2007 Catalogue only permitted foreign investment in manufacturing "new energy" power generation equipment if the foreign investor formed a joint venture with a Chinese company, the 2011 Catalogue has removed that restriction, allowing investors additional flexibility in structuring their investments.
New Categories of "Permitted" Industries
Foreign investment in the manufacturing of a whole automobile has been downgraded from "encouraged" to "permitted" in response to potential overcapacity and concern over "blind investment" in the domestic market. Manufacturing of polycrystalline silicon and the chemical processing of coal have also been downgraded from "encouraged" to "permitted".
By contrast, foreign investment in financial leasing companies and medical institutions has been upgraded from "restricted" to "permitted."
New Categories of "Prohibited" Industries
The construction of "villas" is now classified as "prohibited" in order to reduce speculation in the real estate market. Postal service and parcel delivery service in China are now also in the "prohibited" category.
Overall, the 2011 Catalogue provides foreign investors with increased access to markets in China. The Catalogue reflects China's desire to spur more development in environmentally friendly industries, the high technology industry, and the professional services industry. Foreign direct investors should be aware of these changes when making their investment decisions.
1. Waishang Touzi Chanye Zhidao Mulu (外商投资产业指导目录) [Catalogue of Industries for Guiding Foreign Investment] (promulgated by Nat'l Dev. & Reform Comm'n and Ministry of Commerce, Dec. 24, 2011, effective Jan. 30 2012) (Westlaw) (China).
2. The 2011 Catalogue also provides an opportunity for companies operating within previously restricted industries to restructure their corporate form in China. Previously, companies that wished to operate in a restricted industry may have utilized a Variable Interest Entity ("VIE") structure to enable their investment. These companies are now encouraged to switch to a different corporate structure that will allow them to exercise greater direct control over their operations in China.
Under the VIE structure, Chinese founders would establish a domestic company for the purposes of obtaining a license that otherwise would not be available to foreign investors. A series of contracts were then needed for a wholly foreign owned enterprise to control the domestic company. Without restrictions, foreign investors can simply establish a wholly foreign owned enterprise without the need to contract with a domestic company.
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