China: New Foreign Investment Guidelines in China Encourage Innovation

Last Updated: 21 January 2012
Article by Maarten Roos

China continues to be the world's destination for foreign direct investment, and this trend has only strengthened with the uncertainty that currently prevails in Europe and, to a lesser extent, the United States. Foreign companies, both large and small, are looking to take advantage of China's growing market, efficient production and economies of scale to develop their business.

China welcomes foreign investment in a broad range of sectors, but investment in some industries is encouraged more than in others. Originally introduced in 1995 by the National Development and Reform Commission (NDRC), the Guidance Catalogue for Foreign Investment has been the main indicator to this marketability of investments in China. The catalogue reflects the economic goals that the Chinese government intends to achieve within the term of the latest five-year plan. The end of 2011 saw a revision of the current catalogue of 2007, which eventually will come into effect on 30 January 2012.

Important for foreign entrepreneurs are the categories in which foreign investments are divided. Desirable investments in certain sectors can either be permitted or encouraged, with the latter indicating that the investor can enjoy special tax incentives and preferential approval on projects. Investments in other, less demanded or already developed industries may be subject to restrictions (typically those of environmentally harmful nature, energy-consuming projects etc.) or even be entirely prohibited (due to the protection of national interests). Hence it is of importance to get a clear view of the current trends and changes in the Chinese foreign investment policy.

Overall, the latest revision broadens the opportunities for encouraged and permitted investment. In alliance with one of the targets of China's 12th five-year plan to develop green energy, a main focus of the new guidance catalogue is on innovation and high-end technologies: foreign companies that can introduce or develop high- and new technologies stand to benefit the most.

Strategic Changes

Key industries to be strengthened with guidance from the catalogue include new energy, offshore industries, high-capacity batteries, eco-friendly high-tech manufacturing (equipment gentle to resources such as water-saving technology, recycling solutions, high-end materials), biotechnology and Information Technology (IT). Encouragement of those industries can be seen as an effort to battle the increasing pollution of the country and the extreme demand for fossil fuels.

Furthermore, the new guidelines seek to promote foreign investment in the service industry, directly encouraging branches such as intellectual property rights protection services, e-vehicle recharge solutions and suppliers of offshore pollution cleaning technology. The restrictions on financial leasing services and medical institutions have also been cancelled (meaning they are now permitted).

Investment in the automotive industry is no longer encouraged with the exception of the development of fuel-efficient and innovative e-vehicles. By this means the government intends to protect the booming car market from over-saturation, and to strengthen the position of domestic automobile manufacturers. It remains to be seen what kind of effect this will have on global players such as GM and VW, which currently rule the Chinese market.

Geographical shift: development of the Central and Western Regions

It should be noted that different rules apply for foreign investment in China's central and western regions, which is guided by another catalogue. Amendments are expected to this Catalogue for Foreign Investment in Central and Western Regions as well, in accordance with the requirement of the 12th five-year plan to develop these regions. Considering the logistical and market disadvantages of investing in these regions, the additional benefits can be an important component to the success of attracting foreign investment there.

Conclusion

The numerous industries that benefit from the new guidelines give an interesting perspective on the economical and industrial ambitions of China. Foreign investment in high-quality manufacturing and advanced technologies is highly demanded, while those industries with strong enough Chinese competitors no longer enjoy special privileges. Overall, the new Guidelines for Foreign Investment put a stronger emphasis on the development of state-of-the-art technology, innovation and new energy resources than past efforts.

The removal of a number of sectors from the 'encourage' category tells us that these sectors have become mature and equally competitive to international and local companies. This supports the view that China is no longer a high-risk investment choice. With an improved business environment and strengthened legal framework, China offers plenty of opportunities to foreign business in 2012 and beyond!

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.

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Authors
Maarten Roos
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