On 24 December 2011, the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") jointly issued a new Guideline Catalogue of Industries for Foreign Investment (Amended 2011) ("2011 Catalogue"). The new Catalogue will come into effect on 30 January 2012. It will replace the old Catalogue of 31 October 2007 ("2007 Catalogue"). A working translation of the 2011 Catalogue is available on our website.

All foreign investment into China is subject to approval and registration by the competent Chinese authorities. Foreign investment is divided into the following four categories: encouraged, permitted, restricted and prohibited. The type of category a project belongs to has influence on which level of authorities are in charge of a project and also decides on access to certain incentives.

For the Chinese Government the Guideline Catalogue is an instrument to exercise macro-economic guidance in accordance with its general industry policies. In line with the current policies, the 2011 Catalogue encourages foreign investment in the areas of high technology, advanced manufacturing, new energy and modern service industries. In contrast, sectors which are considered to be overheating, have been removed from the encouraged category, e.g. production of multi-crystal silicon.

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On 24 December 2011, the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") jointly issued a new Guideline Catalogue of Industries for Foreign Investment (Amended 2011) ("2011 Catalogue"). The new Catalogue will come into effect on 30 January 2012. It will replace the old Catalogue of 31 October 2007 ("2007 Catalogue"). A working translation of the 2011 Catalogue is available on our website.

All foreign investment into China is subject to approval and registration by the competent Chinese authorities. Foreign investment is divided into the following four categories: encouraged, permitted, restricted and prohibited. The type of category a project belongs to has influence on which level of authorities are in charge of a project and also decides on access to certain incentives.

For the Chinese Government the Guideline Catalogue is an instrument to exercise macro-economic guidance in accordance with its general industry policies. In line with the current policies, the 2011 Catalogue encourages foreign investment in the areas of high technology, advanced manufacturing, new energy and modern service industries. In contrast, sectors which are considered to be overheating, have been removed from the encouraged category, e.g. production of multi-crystal silicon.

Some major changes brought along by the 2011 Catalogue are as follows:

1. The 2011 Catalogue continuously encourages foreign investments in advanced manufacturing industries. In order to update the traditional manufacturing industries, the Chinese government encourages enterprises with foreign investment to use new technologies, new processes, new materials and new equipments. For example, manufacturing of environmentally friendly special clothing with certain functions and production of functional glass using new technologies have been added into the encouraged category.

2. Foreign investment in strategic new emerging industries is also encouraged. E.g. construction and operation of electricity charging stations and battery replacement stations for automobiles have been newly added into the encouraged category.

3. In the past decades, both foreign as well as domestic car brands have been developing very well in China. On this background, the 2011 Catalogue removes the production of complete automobiles from the encouraged category. The manufacturing of key components of new-energy automobiles has been added into the encouraged category. For these items, the first draft of the new Catalogue had required the establishment of joint ventures. Luckily, this restriction has not been adopted in the enacted version. An exception is the production of high energy power batteries. In this industry only joint ventures are allowed and foreign shareholdings are limited to 50%.

4. Due to overheating investment in the production of multi-crystal silicon and large chemical products using coal as raw material, these two items have also been removed from the encouraged category.

5. China intends to open up more service industries for foreign investment. The 2011 Catalogue has added 9 service industries into the encouraged category, including marine oil pollution clean-up services, venture capital enterprises, intellectual property services, housekeeping services, vocational skills training services, etc. The 2007 Catalogue restricted foreign investment in medical institutions and financial leasing companies. The 2011 Catalogue moves these two items from the restricted category into the permitted category.

6. The 2011 Catalogue has modified limitations on foreign shareholding ratios in a number of industries. For example, according to the new Catalogue, for production of complete sets of equipment or key equipment for generating electricity with new energy resources also wholly foreign-owned enterprises are allowed. The limitation to joint ventures in this industry in the 2007 Catalogue has been abolished.

7. The 2011 Catalogue confirms restrictions in certain strategically important or politically sensitive industries. For example, foreign investment in most sectors of the mining industry is still limited to the form of joint ventures. Foreign shareholdings in value-added telecommunication services industry continues to be limited to 50%, in fundamental telecommunication services to 49%. The publication of books, newspapers and periodicals remains closed for foreign investors.

The 2011 Catalogue shows that the Chinese Government has modified and will continue to modify its policies towards foreign investment by shifting its focus from traditional manufacturing industries to technologically advanced industries and service industries. After over 3 decades of opening-up, the manufacturing industries have absorbed sufficient foreign investment. China now focuses its efforts on trying to attract high technology, know how and technology in newly emerging strategic industries and in services industries. Since for efficient implementation still the regulations pertinent to the relevant industry sectors need to be also amended, it remains to be seen what results the 2011 Catalogue will trigger in practice.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 31/01/2012.