China: China Issues New Policies To Attract Foreign Investments

Making use of foreign investment has long been recognized by the Chinese government as an important part of China's fundamental national policy of opening-up and economic reform, which has played a positive role in developing China's economy, and deepening reforms. China's economy is deeply integrated into the world economy, and the country is facing new challenges and opportunities in the form of foreign investment and maintaining a positive balance of its foreign capital reserves. These challenges are compounded by new trends in global trans-national investment and industrial transfer, as demonstrated by the relocation of some labor-intensive manufacturing plants from China to neighboring Southeastern Asia countries and the US home-manufacturing campaign advocated by the new Trump Administration. A further consideration must be China's "new normal" in economic development, characterized by mid-to-high economic growth rates and a shift from production and investment to service, consumption and innovation.

With a view to creating a favorable business and regulatory environment to attract foreign investment, the Chinese central government has recently launched a series of new policies and initiatives.

China's State Council's Circular No. 5

On January 12, 2017, China's State Council released the "Notice of the State Council on Several Measures for Opening Wider to the Outside World and Making Active Use of Foreign Investment" (Circular No. 5), proposing 20 initiatives intended to revitalize the use of foreign capital, create an excellent business environment and optimize government services. These measures include:

  • Revising the "Catalogue for the Guidance of Foreign Investment Industries" and relevant policies and regulations as well as lifting restrictions on foreign investment in the service industry, manufacturing industry, mining industry and other sectors;
  • Revising the current "Catalogue of Priority Industries for Foreign Investments" in the Midwest region by expanding the scope of encouraged industries in the Midwest and Northeast regions;
  • Enhancing IP protections for foreign invested enterprises in China and offering national treatment to foreign invested enterprises in government procurement projects;
  • Allowing local government to specify incentive policies to attract investors and prioritizing substantial land use by offering discounted land premiums to foreign investors;
  • Promoting the full adoption of the model of pre-entry national treatment plus negative list approach in foreign investment management, and simplifying the procedures for both the establishment of foreign invested enterprises and managing foreign investment projects.

Proposed Revisions to the 2015 Foreign Investment Industry Guidance Catalogue (National FDI Catalogue)

In December 2016, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOC) requested public comments on the "Amendment Draft of Catalogue of Industries for Guiding Foreign Investment" (Draft Amendment). According to the Draft Amendment, the number of restricted industries for foreign investment was reduced from 93 to 62, but some industries such as the financial services industry remain tightly regulated. Circular No. 5 affirms the relaxation of the restrictions as reflected in the Draft Amendments and calls for further liberalization of certain restrictive industries, including:

  • Relaxing restrictions on the market entry of foreign investment in banking, financial institutions, securities companies, securities investment fund management companies, futures companies, insurance institutions and insurance intermediaries;
  • Relaxing previous restrictions for foreign investment in oil shale, oil sands, shale gas and other fields of unconventional oil and gas as well as mineral resources;
  • Liberalizing restrictions on the market entry of foreign investment in accounting and audit, architectural design, rating services and other related fields;
  • Promoting the orderly opening-up of telecommunications, culture, education, transportation and other related fields;
  • Eliminating restrictions on the market entry of foreign investment in the manufacturing of rail transport equipment, motorcycle manufacturing, fuel ethanol production, oil and fat processing and other fields;
  • Encouraging investment in high-end manufacturing, smart manufacturing, and green manufacturing as well as production-oriented services such as industrial design and innovation, engineering consulting, modern logistics, inspection, testing and certification related to the "Made in China 2025 Strategy";
  • Supporting foreign investors to participate in infrastructure construction, including projects of energy, transportation, water conservancy, environmental protection, municipal public works, etc., by way of concession operations. Providing concessions to foreign investors to encourage large-scale infrastructure construction projects within the energy, transportation, water conservation and environmental protection.
  • Supporting foreign investment in research and development centers, enterprise technology centers, post-doctoral research stations.

On June 28, 2017, MOC and NDRC jointly released "Catalogue of Industries for Guiding Foreign Investment (2017 Catalogue) which will become effective on July 28, 2017. The 2017 Catalogue makes minor changes to the Draft Amendment and officially confirms the liberalizations as called for by the Circular No.5.

Catalogue of Priority Industries for Foreign Investment in the Central and Western Region (CWR FDI Catalogue)

On February 20, 2017, the NDRC and MOC jointly released the revised "Catalogue of Priority Industries for Foreign Investments in the Central and Western Region" (2017 CWR FDI Catalogue), which came into effect on March 20, 2017.

The 2017 CWR FDI Catalogue added 173 new industrial priorities, expanding the list to a total of 639priorities. In addition, it removed 34 items and modified 84 items from the previous 2013 version of the CWR FDI Catalogue. The major changes in the 2017 CWR FDI Catalogue include the following:

  • Supporting the integrated development of electronics and pharmaceuticals in some provinces, by prioritizing glass substrate, integrated circuit manufacturing, smart phones, tablet computers, and bio-pharmaceuticals;
  • Encouraging agricultural innovation and enhancing the modernization of agricultural operations, e.g., the processing of organic food in Heilongjiang Province or developing standardized vegetable bases in the Inner Mongolia Autonomous Region;
  • Prioritizing engineering reconnaissance, graphic design and logistics in certain provinces to promote services industries. In addition, refining and upgrading the consumer services industry, by prioritizing tourism and leisure, culture and sports in certain provinces;
  • Prioritizing the development of urban parking facilities, electronic car charging facilities and road freight station facilities to promote the development of transportation and logistics networks;
  • Prioritizing export-oriented textile, clothing, and furniture businesses to promote new export-oriented industrial clusters in provinces with labor advantages.

Unlike the National FDI Catalogue which categorizes foreign investments as either "encouraged" projects which will receive tax incentives, and "restricted" and "prohibited" projects which will not, the foreign investment priorities listed in the CWR FDI Catalogue are all eligible for applicable preferential policies, as long as these foreign investments are carried out in the prescribed areas.

Special Management Measures for the Market Entry of Foreign Investment in Pilot Free Trade Zones (Negative List)-2017 Version

On June 5, 2017, China's State Council's office published the Special Administrative Measures (Negative List) on Foreign Investment Access to the Pilot Free Trade Zones (the 2017 Negative List). Compared with the previous version released in April 2015 (the 2015 Negative List), the 2017 Negative List, which will come into effect on July 10, 2017, significantly reduces the range of industries and activities in which foreign investment is either restricted or prohibited in China's Pilot Free Trade Zones (FTZs).

The "negative list" is an innovative approach recently adopted by the Chinese government to attracting foreign investment in the FTZs, an important step towards opening the Chinese market to foreign investment. Under the negative list approach, if an industry or activity is not explicitly restricted or prohibited by its inclusion in the negative list, foreign investors may freely invest in said industry and receive national treatment in the same manner as Chinese investors.

When the negative list was first introduced for China's first FTZ in Shanghai in 2013, the number of listed restricted industries and activities disappointed many foreign investors. The long Negative List was reduced from 190 to 139 in 2014, and further reduced to 122 by the 2015 Negative List. The 2017 Negative List makes further significant cuts and the total restricted industries listed are reduced to 95.

Restrictions removed from the list mainly pertain to the manufacturing and service sectors. For example, the 2017 Negative List removed previous requirements that electronic automobile manufacturers must use their own trademarks and possess their own intellectual properties, licensed inventions, and patents; and that manufacturing of rail transportation equipment should be confined to equity joint ventures or contractual joint venture cooperation. In the service sectors, the minimum operational requirements for foreign invested banks to engage in RMB services have also been removed.

A complete list of the 2017 Negative List may be obtained here (in Chinese). It is also expected that the current negative list approach being tested in the FTZs may eventually be applied across the entire country.

Conclusion

In a nutshell, the Circular No. 5, the 2017 Catalogue, the 2017 CWR FDI Catalogue and the 2017 Negative List indicate China's determination to further build an investment-friendly environment for foreign investors so as to enhance its ability to compete in the global arena. It is also expected that a series of supporting documents and measures will be developed and introduced in the near future.

China Issues New Policies To Attract Foreign Investments

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