China's National Development and Reform Commission has started a consultation round on its new catalogue of rules relating to foreign investments in China. The draft catalogue shows that the Chinese market is slowly, but surely, further opening up to foreign parties active in areas such as investment banking, trust services, high-tech and alternative energy. But opportunities for foreign investments in the motor vehicle industry are further restricted. On balance, the new catalogue provides a little more room for foreign investments. We recommend that clients who are active in industries affected by the new rules identify how this may provide new opportunities to them.
On 4 November 2014, the NDRC released for public consultation a draft revision of its Catalogue for the Guidance of Foreign Investment Industries. The catalogue was first introduced in 1995 and has been revised almost every three years. The latest revision took place in 2013.
As one of Chinese government's core regulations on foreign direct investment, the catalogue divides foreign investments in Chinese industries into three categories:
- Investments in "encouraged" industries will be generally approved by local authorities and enjoy certain tax or other benefits.
- Investments in "restricted" industries are subject to a higher level of scrutiny, and the competent authority can suspend or withhold its approval of an investment at its sole discretion.
- Investments in "prohibited" industries are not permitted.
Industries not listed in the catalogue are considered "permitted" and will generally be approved by local authorities. Moreover, the catalogue sets out shareholding restrictions and models for foreign investment in specific industries. Those restrictions mostly concern restricted industries, but even some encouraged industries still have foreign shareholding restrictions.
Compared to the current catalogue, the new draft catalogue reduces:
- from 79 to 35, the number of restricted industries, making it easier to obtain approval for foreign investments in sectors such as investment banking, trust services, insurance brokerage, and real estate development.
- from 43 to 11, the number of industries which foreign parties may only operate in as part of a joint venture with a local party. This means that foreign parties no longer require a local partner to operate in areas such as production of automobile parts, aircraft or vessel engines and components, and accounting and auditing services.
- from 44 to 32, the number of industries in which foreign parties can only hold minority shareholdings. This change enables foreign parties to be majority shareholders in companies active in, for example, international sea transportation, and the construction, maintenance and operations of railways.
The current revision of the catalogue follows the NDRC's revision of the catalogue for Chinese outbound investments, which we reported on in our May 2014 edition. The new draft catalogue sets out a foreign investment scheme that is more favourable to foreign investors than the investment scheme currently adopted in the Shanghai Pilot Free Trade Zone.
On the other hand, the new draft catalogue imposes tighter control over a number of industries, including the manufacturing of motor vehicles. New foreign investors can no longer become majority shareholders in this industry, and the manufacturing that foreign investors can be involved in will be limited to a number of specific vehicles. The new draft catalogue is therefore not good news for all foreign investors.
The deadline for public comments on the draft revision was 3 December 2014, and the final version is expected before the end of 2014. In order to take effect, the catalogue must be implemented by specific laws and regulations. It therefore remains to be seen how and when the new catalogue will be implemented in practice. We recommend that clients active in industries that are affected by the rules set out in the new catalogue identify how these rules may impact their business plans and opportunities.
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