Release of the Latest Edition of the Catalogue for Guiding Foreign Investment

On December 29, 2011, the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") jointly released the Catalogue for Guiding Foreign Investment (2011 edition) (外商投资产业指导目录2011年修订) ("Catalogue 2011"). The Catalogue 2011 came into effect on 31 January 2012. At the same time, the previous effective version of the Catalogue for Guiding Foreign Investment (2007 edition) (外商投资产业指导目录2007年修订) ("Catalogue 2007"), which was issued in October 2007 and came into effect in December 2007, is superseded. Foreign investment projects to be approved after the implementation of Catalogue 2011 should follow the updated catalogue while those having been approved before that should still follow the provisions of Catalogue 2007.

The finalised Catalogue 2011 is based on the public feedback to the "Consultation Draft of the Amended Catalogue for Guiding Foreign Investment" (外商投资产业指导目录修订征求意见稿) ("Consultation Draft"). Catalogue 2011 addresses two key aspects: namely, a further expansion of the opening-up of the market for foreign investment, and guiding the foreign investment orientation, i.e., encouraging more foreign investment in high-end manufacturing industries, new and high technology industries, modern service industries, and the new energy, energy-conservation and environmental-friendly industries.

High-end Technologies are encouraged

Catalogue 2011 gives priority to high-end manufacturing industries. The manufacturing of certain new products and the use of certain new technologies, such as new products and new technologies in textiles, chemical industry and machinery manufacturing industries, are added to the encouraged category. On the other hand, vehicle manufacturing (汽车整车制造) has been removed from the encouraged category to ensure the smooth development of the relatively weak domestic car industry. To avoid overcapacity and redundant construction of traditional manufacturing plants, the production of polysilicon (多晶硅) and chemical processing of coal (煤化工) have been deleted from the encouraged category.

Industries proposed to be added to the encouraged category

Compared to Catalogue 2007, one of the major modifications in Catalogue 2011 is the substantial preference to be given to new energy and environmental friendly industries. For instance, the manufacturing of certain components for wind turbines, parts for new energy automobiles, equipment for re-cycling and water treatment facilities and equipment for prevention of certain types of pollutants, as well as the construction and operation of water-recycling plants and electric vehicle charging stations are added to the encourage category. Industries which facilitate sustainable development, such as the recycling of waste electrical appliances, electronic products, mechanical and electronic equipment and batteries, have been placed in the encouraged category.

Comparing the Consultation Draft and Catalogue 2011, we note that in addition to the current scope encouraged category in the Consultation Draft, more recycling industries such as the utilisation of leather waste (皮革废弃物综合利用) have been added to the encouraged category to further improve environmental protection. It is also noted that more efforts are made in Catalogue 2011 than the Consultation Draft to encourage the development of new energy. For instance, Catalogue 2011 has expanded the Sino-foreign investment forms of unconventional natural gas resources exploration and development (非常规天然气资源的勘探和开发) from Sino-foreign cooperation to both Sino-foreign cooperation and Sino-foreign joint venture.

Apart from the main theme of environmental protection and new energy, Catalogue 2011 also reflects China’s emphasis on certain industries which it would like to see play a more significant role in the global market; such as certain kinds of research and development in relation to aviation, automobile and the new generation IPv6 internet system and the manufacturing of certain parts for high-speed railways and automobiles, etc. All these focused industries are added to the encourage category.

More service industry items have been added to the encouraged catalogue, such as electric vehicle charging stations (机动车充电站), foreign invested venture capital investment (创业投资企业), intellectual property service industries (知识产权服务), offshore oil pollution cleaning up technology services (海上石油污染清理技术服务), professional skills training, (职业技能培训), domestic service industry (家庭服务业) , and energy saving technology development and services (节能技术开发与服务).

Uplifted restrictions

Franchising, financial leasing, auctioneering and medical institutions which were originally classified under the restricted category of foreign investment under Catalogue 2007 have been deleted from this category and will generally be regarded as under the permitted category under Catalogue 2011. At the same time, restrictions on the foreign equity percentage (外方股比) in areas such as new energy power generation equipment (新能源发电成套设备) have been canceled. Items that have foreign equity percentage restrictions, located in both the encouraged category and the restricted category, show a 10 fold reduction.

Newly added restrictions and prohibitions

Consistent with a key theme of environmental protection, certain industries, in particular those relate to manufacturing, that are highly polluting, energy consuming and resource dependent have been removed from the encouraged category. Some of them, such as the possessing of nuclear fuel, manufacturing of paints and colors which contain toxic compounds are now included in the restricted category.

We also note that Catalogue 2011 has removed encouragement of the production of ethylene with a scale of annual output of 1 million tons or more (Chinese Party Relative Holdings) (年产100万吨及以上规模乙烯生产(中方相对控股)), which is in consistence with the Catalogue for Guiding the Industrial Restructuring (2011 year) (《产业结构调整指导目录(2011年本)》 ); issued by NDRC on 27 April 2011. It may indicate the even tighter reviewing and approving of the production of ethylene projects.

The prohibition against production, research and development of genetically modified plant seeds will be extended to include any genetically modified organisms, whilst the prohibition against postal service companies will be extended to specifically cover companies engaging in domestic express delivery of letters.

A concern to many foreign investors may be the controls over real estate investment. Under Catalogue 2011 construction and management of villas are added to the prohibited category. This prohibition seems to follow the circular issued by the Ministry of Land and Resources issued in March 2010 which strictly restricts the supply of land for the construction of villas.

By comparing the Consultation Draft and the Catalogue 2011, we note that the agro-food processing industry (农副食品加工业) in the restricted category has been particularised to include peanut oil, cotton seed oil, tea seed oil, sun flower oil, palm oil and other edible oil processing (Chinese Party holding) (花生油、棉籽油、茶籽油、葵花籽油、棕榈油等食用油脂加工(中方控股)). The restriction of the processing of rice and flour has also been added. This indicates a concern of the government authorities with the continuous expansion of the domestic grain and oil processing industries. Such restrictions will control the expansion of the processing capacity of domestic related grain varieties with a view to guiding the healthy development of the domestic grain and oil processing industry.

Issues to be noted

It is noted that certain adjustments made in Catalogue 2011 reflect the changes of the relevant laws and regulations for foreign investment since Catalogue 2007 came into effect. On the other hand, some of the changes cannot be found in the current laws and regulations and are considered as changes to be made to the foreign investment policy in China. It is yet to be seen how these latest changes are to be reflected in the applicable laws and regulations.

Catalogue 2011 has made numerous changes to the Catalogue but the above analysis is not intended to be an exhaustive checklist of the changes proposed to be made pursuant to Catalogue 2011, and we are always happy to discuss with our clients the impact of any proposed changes to a particular industry or area of foreign investment.