China: China Adopts Fifth Catalogue of Industries for Guiding Foreign Investment

Last Updated: 18 June 2012
Article by James T. Hsiung, Patrick H. Hu, Simon Li, Jessie Chenghui Tang and Ying Wang

In the past, the Chinese government's position with respect to foreign investments tended to encourage the volume and scale of investments, generally with little regard to the industries into which such foreign investments were directed. After many years of robust development by foreign investors, the Chinese government started focusing more on developing specific industries that, in its view, would yield the greatest benefits to Chinese society (e.g., foreign investments in more technologically advanced, sustainable, and environmentally friendly industries), while shifting its support away from encouraging foreign investments in the "overheated" high-energy-consuming and high-polluting industries.


This shift in China's policy regarding foreign investments is reflected by the fifth Catalogue of Industries for Guiding Foreign Investment (the "2011 Catalogue" or "Catalogue") promulgated by China's National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") on December 24, 2011. The Catalogue, since its first release in 1995, has served as important policy guidance for foreign investors who are interested in taking part in China's rapid development and increased receptiveness to investment. The Catalogue classifies China's industrial sectors into three categories: "encouraged," "restricted," and "prohibited." Sectors that are not specifically listed in the Catalogue are considered to be "permitted" sectors. The 2011 Catalogue includes some notable changes from the previous version, which changes will be discussed in this Commentary.

Foreign investors could regard the Catalogue as an indicator that will show which industries are needed by the Chinese economy and those industries that are "restricted" and "prohibited" to foreign investors either for the purpose of protecting local business developers or because of national security concerns.

China implements varying policies in different categories of industrial sectors with regard to tax incentives and approval procedures. For example, local governments can approve foreign investment in the "encouraged" and "permitted" categories (under a certain monetary amount), while foreign investment in "restricted" industrial sectors requires higher-level approval. Although corporate income tax reduction or exemption has not been available to foreign-invested companies since the 2008 tax reform, certain local governments do have other policies, such as subsidies or tax return for the local tax portion of the foreign investment in the "encouraged" industrial sectors.

The 2011 Catalogue reflects the Chinese government's policy preferences and focuses on the following areas of development in China: (i) continued and enhanced receptiveness to foreign investment—the 2011 Catalogue has added several encouraged sectors and removed restrictions on shareholding of foreign investors from many sectors; (ii) upgrading the manufacturing industry—for example, the manufacture of recycled equipment and touch control systems has been added into the "encouraged" category; (iii) promotion of new strategic industries such as new energy, new materials, high-end equipment, and energy-saving equipment—for example, exploration and exploitation of unconventional natural gas resources and production of biomass fibers by utilizing new types of renewable resources and environmentally friendly process have both been added to the "encouraged" category; and (iv) development of a modern service industry—the 2011 Catalogue has included nine service sectors as "encouraged," including intellectual property rights services, household services, and occupational skills training.

These policies were restated and confirmed by China's Premier Wen Jiabao in the 2012 Government Work Report delivered at the National People's Congress in Beijing on March 5, 2012, which emphasizes the Chinese government's commitment to the new initiatives.

In this Commentary, we summarize and highlight the major changes in the 2011 Catalogue and Premier Wen Jiabao's 2012 Government Work Report.

Mining Industry

China has long adopted a conservative attitude toward the exploration and exploitation of its natural resources by foreign interests, which is why many mining activities remain in the "restricted" category. These include exploration and mining of high-aluminum fireclay, wollastonite, graphite, and other important nonmetallic metals; mining and mine selection of lithium mines and iron sulfur mines; and extraction of brine resources from salt lakes. However, it is interesting to observe that the 2011 Catalogue includes the exploration and exploitation of unconventional natural gas resources in the "encouraged" category. Although investment in this sector is limited to joint ventures, it shows that the government is favoring those industries that utilize new or sophisticated exploitation technology, such as shale gas.

Manufacturing Industry

Over the past 30 years of reform and opening up, China has achieved rapid development and at the same time has suffered the unfortunate side effects of unbalanced development and severe environmental degradation. According to the 2012 Government Work Report, China is in the process of upgrading its industry structure and promoting new strategic sectors such as new energy, new materials, and high-end and environmentally friendly technology.

These policies are evidenced by the changes made in the 2011 Catalogue. For example, the items added to the "encouraged" category are foreign investments in production of functional and ecological clothing; development and production of functional glass using new technologies; production of organic–inorganic composite cellular insulation materials; development and production of high-quality artificial crystals and thin-film transistor products; and manufacture of recycled equipment. Some sectors have been removed from the "restricted" category and are now permitted under the 2011 Catalogue, including the production of carbonated beverages and the manufacture of containers.

Real Estate Industry

In order to control housing prices and excessive investment in the real estate market, China has continued to exert tight controls over both domestic and foreign investments in the real estate sector. This is further evidenced by the changes in the 2011 Catalogue, which moves foreign investment in the construction and management of villas1 from the "restricted" category to the "prohibited" category. Since as early as 2006, China has promulgated a series of regulations aiming to limit foreign investment in the overheated real estate market, which has raised the bar for all foreign firms intending to enter the Chinese real estate market. It has done so by implementing strict requirements on the form of investment, threshold of capital, financing, and other factors. Moreover, with regard to construction of villas, a number of regulations have been put in place since 2003, prohibiting domestic and foreign invested developers from investing in this housing category by restricting the supply of land for this purpose. Thus, foreign invested developers had been already constrained in this field prior to the promulgation of the 2011 Catalogue. The aforesaid change in the 2011 Catalogue could be regarded as a reiteration of the same policy and therefore does not reflect more material restrictions on foreign investment in the construction and management of villas.

Medical Industry

In order to modernize its medical industry, China has taken a more open attitude under the 2011 Catalogue. For example, foreign investment in medical institutions and the wholesale and retail sales and distribution of medicine is removed from the "restricted" category and is now "permitted." Similarly, production of biovaccines has been added to the "encouraged" category, and production of non-self-destructible disposable syringes, transfusion apparatus, blood transfusion apparatus, and blood bags has been removed from the "restricted" category and is now "permitted."

While foreign investment in China's hospital and medical facility market started in the 1980s, foreign investors were not allowed to establish wholly foreign-invested hospitals or other medical institutions. According to the 2011 Catalogue and other new regulations, China will be gradually removing the various restrictions on foreign investors' shareholding percentage in joint ventures and eventually opening the market for wholly foreign-invested medical institutions.

Modern Service Industry

As pointed out by Premier Wen Jiabao in the 2012 Government Work Report, China will exert its efforts to develop modern service industries. According to Premier Wen, this will optimize the social and industrial structure, improve people's living standards, and create more job opportunities. Under the 2011 Catalogue, China has opened several new service markets to foreign investors; for example, rural distribution, intellectual property rights services, household services, and occupational skills training have been added to the "encouraged" category, and foreign investment in goods auctions has been removed from the "restricted" category and is now "permitted."

Prior to the promulgation of the 2011 Catalogue, only Hong Kong and Macau investors were encouraged to engage in trademark and patent agency services according to their respective Closer Economic Partnership Arrangements. Under the 2011 Catalogue, foreign investment in the full range of intellectual property services is now encouraged, including agency, transfer, registration, evaluation, and consultation services of patent, trademark, copyright, and other intellectual property rights.

Financial Industry

The 2011 Catalogue includes several notable changes with respect to foreign investments in the financial industry. The "startup investment enterprise" has been added to the "encouraged" category, and foreign investment in financial leasing companies has been removed from the "restricted" category and is now "permitted." In accordance with the Interim Administrative Measures on Startup Investment Enterprises promulgated by the NDRC in 2005, the term "startup investment" means any equity investments in an unlisted and emerging enterprise being established or re-established (the "startup enterprise"), with the goal of deriving capital gains from share transfer after the invested startup enterprise becomes mature. This term is similar to the definitions of "venture capital" and "private equity" from the perspective of foreign investors. China believes this positive move would effectively stimulate the development of emerging and high-tech companies.

Foreign-invested "startup investment enterprise" was categorized as "permitted" under the 2007 Catalogue. While some local governments have adopted various preferential measures to support the development of startup investment enterprises, the policy of the central government had fallen behind the incentives offered by local governments, hence startup investments' change to "encouraged" from "permitted." With this significant policy change in the 2011 Catalogue, we can expect more favorable policies to be implemented in this industrial sector.

Conclusion

Overall, the 2011 Catalogue reflects China's continuous commitment to further expand its opening-up policy as the industries falling under the "encouraged" category have increased while the number of industries listed in the "restricted" and "prohibited" categories has fallen. However, these changes contained in the 2011 Catalogue signal that the Chinese government's policy on foreign investment has become more mature and rational, such that volume and scale of the foreign investments are no longer the primary focus. The changes in the 2011 Catalogue reflect China's determination to optimize the structure of foreign investments and to direct such investments into new technology, high-end sectors, and environmentally friendly industries. We expect that governmental authorities will be passing new laws, as well as revising existing ones, in the near future to support the policy shifts reflected in the 2011 Catalogue.

Footnotes

1. "Villas" is similar in concept to "single family homes" and "townhomes" in the United States.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions