China: With the sixth revision of the Foreign Direct Investment Industries Guidance Catalogue, China plans sweeping foreign investment reforms

Last Updated: 5 May 2015
Article by Xu Ping, Wang Rong and Yao Lijuan

On 13 March 2015, the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") officially released the sixth revision of the Foreign Direct Investment Industries Guidance Catalogue (the "2015 Investment Catalogue"), which will be effective from 10 April 2015. The 2015 Investment Catalogue is the central policy of the Chinese government that regulates the inflow of foreign investments in various Chinese industries. It classifies foreign direct investments as "encouraged," "restricted," "permitted," or "prohibited" and imposes restrictions on foreign investment forms and shareholdings on certain key industrial sectors. Since its inception in 1995, the Investment Catalogue has been revised regularly. This is the sixth revision and one of the most notable revisions in the past two decades, which reflects certain features of the Report on the Work of the Government (2015) recently published in the Chinese "Two Sessions", such as streamlined administration, power delegation, establishing a "negative list" for market entry and deepened reforms on the investment approval system.

The 2015 Investment Catalogue also echoes market expectations for further liberation of Chinese industrial sectors to facilitate foreign investments. In 2013, the Shanghai Free Trade Zone ("FTZ") was launched. The FTZ bypassed the then Investment Catalogue by adopting an internationally recognized "negative list" approach. In 2014 the FTZ amended the Special Administrative Measures for the Access of Foreign Investment (i.e. the negative list) to reduce the number of prohibited and restricted industries from 190 to 139. However, as the negative list of the FTZ only applies to the designated area, the market has been expecting the approach to be introduced nationally and a greater degree of reform to be carried out by the Chinese government in the foreign investment area. Though the 2015 Investment Catalogue has not yet adopted a negative list approach, it has liberalized foreign investments to a degree comparable with the FTZ's negative list.

Specifically, this revision encourages foreign investments in sectors such as advanced manufacturing, modern services, and scientific and technological research and development, and signals a shift towards hands-off regulation on sectors unrelated to economic security or public interest. Overall, the number of encouraged sectors does not change significantly, but the number of restricted sectors reduced sharply from 79 to 38; moreover, limitation on foreign ownership percentage in many sectors has now been lifted (the number of sectors subject to Sino-foreign joint ventures was reduced from 43 to 15, and the number of sectors requiring Chinese majority shareholding decreased from 44 to 35). It is also noteworthy that several additional restricted sectors (e.g. motor, financial services) in the 2015 Investment Catalogue are not new, but are the result of consolidation of other sectorial regulatory restrictions into the 2015 Investment Catalogue. Last but not least, the 2015 Investment Catalogue deleted a reference provision which allows for the application of other specific regulations and industrial policies. Such deletion is significant for foreign investment regulation because it means, on the one hand, that the 2015 Investment Catalogue has consolidated investment restrictions that were previously scattered in various sectorial regulations, and, on the other hand, that sectorial regulations (whose validity are lower in hierarchy than laws and State Council regulations) are unlikely in future to impose other restrictions on foreign investment.

Now we will look at the 2015 Investment Catalogue in more detail in the major industrial sectors.

1. Manufacturing

Under the 2015 Investment Catalogue, restrictions on the manufacturing industry have been significantly eased. Restrictions on the manufacture of beverages, chemical raw materials and products, chemical fibres, general-purpose and bespoke equipment (except arms and ammunition, which are still prohibited), transportation equipment, communications equipment, computers and other electronic equipment have been reduced almost to zero. It implies that the aforementioned activities will now be considered as "permitted" so foreign investment can be carried out without restrictions on shareholding or investment forms. Despite that, for macro-economic considerations, a few sectors are clearly labelled "restricted", such as agricultural processing of raw sugar, vessel repair, ship building and design.

2. Pharmaceutical and Medical

We also see a considerable change in the health care industry. The 2011 Investment Catalogue categorized certain pharmaceutical products plagued with market overcapacity (such as a number of vitamins and calcium), narcotics and class-A psychoactive raw drugs as "restricted", but such restrictions have been lifted in the 2015 Investment Catalogue, which means they now fall into the "permitted" category. This change shows the government's willingness to allow the market to adjust the development of these sectors.

On the other hand, we note that the government imposes tighter control under the 2015 Investment Catalogue over the establishment of medical institutions. Medical institution is categorized "permitted" under the 2011 Investment Catalogue, but in practice setting up wholly foreign-owned medical institutions is very difficult in China. Despite recent policy breakthrough such as allowing wholly foreign-owned medical institutions to be set up in the FTZ and seven pilot cities and provinces such as Beijing and Tianjin , and notwithstanding the heated discussions in the sector regarding thorough removal of limitation on foreign investment in medical institutions, the 2015 Investment Catalogue moves medical institution back to the "restricted" category and limits it to joint ventures, thus suggesting that foreign investment in medical institutions will remain restricted in the foreseeable future.

3. Auto Industry

For the first time, the 2015 Investment Catalogue designates the manufacturing of complete cars, specialty vehicles and motorcycles as restricted, with Chinese ownership of at least 50%. One foreign investor is not permitted to invest in more than two joint ventures manufacturing the same type of motor vehicle (passenger car, commercial car or motorcycle) in China, except where the foreign investor acquires or merges other car manufacturers in China together with a Chinese joint venture partner. The above restriction is consistent with the Car Industry Development Policy issued in 2004, except that the manufacturing of agricultural vehicles is not covered in the "restricted" category under the 2015 Investment Catalogue.

Remarkably, the manufacture of complete cars was once categorized as "encouraged" under the 2007 Investment Catalogue, but later became "permitted" under the 2011 Investment Catalogue and subject to regulation by the Car Industry Development Policy. This time, the 2015 Investment Catalogue explicitly categorizes complete car manufacturing as a "restricted" industry, thus signifying the gradual tightening of foreign investment in the car manufacture industry and support for the development of the domestic car industry. The 2015 Investment Catalogue indicates that relaxation of the foreign ownership ratio in car manufacturing joint ventures may be temporarily halted despite the significant attention it has received recently. Nevertheless, in certain related sectors, foreign ownership ratio has been loosened, for example joint ventures are no longer required for 400-ton-or-above wheeled or caterpillar hoisting machinery manufacturing.

In the draft version Investment Catalogue circulated recently, investment method restrictions on a number of sectors in car electronic device manufacturing and R&D industry in the "encouraged" category (e.g. car electronic bus network technology, electronic controller for electric power steering system, embedded electronic integrated system) have been deleted (i.e. foreign investors can choose to set up either wholly-owned enterprises or joint ventures), but the 2015 Investment Catalogue eventually only deleted such restrictions in respect of embedded electronic integrated system production and R&D, partly reflecting regulators' concerns over further relaxation on foreign investment in the car industry.

4. Telecommunications and Internet

Overall, the Chinese government is supportive of the development of emerging sectors such as telecommunications and internet. The 2015 Investment Catalogue removes the cap on the foreign shareholding ratio in the e-commerce sector (such relaxation has been in force in the FTZ since January this year). Consequently, foreign investors may set up wholly-owned e-commerce companies in China (not limited to the FTZ).

In addition, the development and application of technologies related to Internet of things is added to the encouraged category. This new addition is in line with the Chinese government's policy of gaining leading technological advantage in the field of Internet of things in an era of mobile Internet.

On the other hand, in line with foreign investment policies in the publication sector, services related to Internet publishing are prohibited under the 2015 Investment Catalogue. This is hardly surprising as it is consistent with a joint regulation in 2005 of the Ministry of Culture and the Administration of Press and Publication, Opinions on Foreign Investment in the Cultural Sectors, which explicitly prohibits foreign investment in Internet publication.

5. Infrastructure and Real Property

Compared with the 2011 version, the 2015 Investment Catalogue lifts foreign investment restrictions in underground railway and real property projects. Specifically, the construction and operation of city underground and overground railway transport no longer requires Chinese majority shareholding, and foreign investors are permitted to establish wholly-owned enterprises to construct and operate the aforesaid projects. In addition, real property projects now become a "permitted" category, and there are no more restrictions on foreign investment in land development and construction and operation of luxury hotels, office buildings and international convention and exhibition centres.

6. Education

Contrary to the liberalization trends enjoyed by other sectors, the 2015 Investment Catalogue generally imposes more stringent restrictions on foreign investment in the educational sector. Both tertiary and pre-school education are added to the restricted category and are limited to co-operative joint ventures led by a Chinese party. Upper years of comprehensive secondary school education remain "restricted" and must also be led by a Chinese party. Compulsory education (i.e. primary school and lower years of secondary school) is categorized as "prohibited", so remains off limits to foreign investors. On the other hand, occupational training becomes an encouraged category, reflecting supportive state policy in this field.

7. Energy

Significant reforms are also seen in the energy sector. The construction and operation of power grid is moved from restricted to encouraged category; although still subject to Chinese majority shareholding, such a change reflects the government's positive attitude towards foreign participation in operating Chinese power grids. Furthermore, the 2015 Investment Catalogue encourages clean coal power generation, construction and operation of waste water treatment plant and certain types of large-scale power plant, showing the government's support for foreign investment in clean energy and large-scale power plant.

8. Entertainment and Professional Services

Investment in entertainment is also liberalized. Under the 2015 Investment Catalogue, the operation of performance venues in the encouraged category no longer requires majority Chinese shareholding, and the operation of entertainment venues now becomes a "permitted" activity.

Investment in accounting and auditing services in the encouraged category is no longer subject to joint venture or partnership under the 2015 Investment Catalogue, but the senior partner is required to be a Chinese national. This signifies that foreign investors are permitted to establish wholly-owned accounting firms to provide accounting and auditing related services in China.

However, some service sectors such as legal services and relic auctions are under tighter control. Under the 2011 Investment Catalogue, legal advice was categorized "restricted", but in the 2015 Investment Catalogue, providing Chinese legal advice is explicitly listed as "prohibited" (in the meantime it clarifies that foreign law firms may provide information on the Chinese legal environment), upholding China's WTO entry promises and the relevant regulations on the representative offices of foreign law firms. In addition, relic auction houses and relic shops are also explicitly listed as "prohibited" under the 2015 Investment Catalogue.

In general, the 2015 Investment Catalogue shows the determination and efforts of the Chinese government in improving its regulatory regime on foreign investments, and is a step forward towards the "national treatment" of foreign investors. At the same time, against a backdrop of "streamlined administration and power delegation", major breakthroughs in the foreign investment approval system are also foreseeable. Also it is worth mentioning that MOFCOM recently published a discussion draft of the Foreign Investment Law, which provided for a "foreign investment special administrative catalogue (i.e. the negative list)". When the Foreign Investment Law is promulgated later, the investment catalogue may eventually be replaced by the negative list.

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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