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.
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