China Expected to Lift Restrictions on Foreign Direct Investment through New Guidance

Recently, the PRC National Development and Reform Commission (“NDRC”) and the PRC Ministry of Commerce jointly released a revised version (“Consultation Draft”) of the Foreign Investment Industrial Guidance Catalogue (“FDI Catalogue”) for a one-month public consultation ending on 3 December 2014. The Consultation Draft makes sweeping changes to the current version issued in 2011, easing regulation on foreign investment by removing foreign ownership restrictions and substantially cutting down the list of restricted industries. These changes are especially welcome to those foreign investors looking to tap the dynamic Chinese market.

Background

First released in 1995, the FDI Catalogue has been serving as the fundamental piece of guidance for foreign investors in China. It classifies industries into three categories under which, foreign investment is encouraged, restricted or prohibited. Those industries that are not listed in the FDI Catalogue are deemed as permitted categories for foreign investment.

So far, the FDI Catalogue has experienced six rounds of changes with the latest, and most aggressive, round reflected in the Consultation Draft. Through the draft, several industries have been opened up including those that are not even available for investment in China’s most progressive frontier, the Shanghai Free Trade Zone.

Major Developments

The key changes introduced by the Consultation Draft that lift foreign investment restrictions and promote the development of desirable industries are as follows:

1. Removal of Foreign Ownership Restrictions. Nearly 3/4 of the industries subject to the requirements for forming joint ventures with Chinese parties and approximate 1/4 of the industries for which the Chinese party(ies) should hold the majority stake are dispensed with the aforesaid requirements. Foreign investors can now invest in R&D and/or manufacturing of the BUS network technology, the electronic controller of electric power steering systems, and the embedded electronic integrated system for automobiles without partnering with a Chinese party. E-commerce is also no longer subject to the 50% foreign ownership ceiling.

2. Cut of Restricted List. The list of restricted categories has been axed by more than half. Direct selling, sale via mail order or internet, e-commerce, publication printing as well as production of chloromycetin, penicillin and some other antibiotics are just a few examples of industries that have been removed from list.

3. Manufacturing Sector. A number of industries relating to the manufacture of advanced material and equipment, such as water-based industrial paints, multifunctional office equipment, certain medical monitoring and analysis equipment and instruments, large scale industrial controller and EDA systems, are added to the encouraged category. Further, the specifications for certain types of instruments and meters and other machinery equipment (such as large scale precision instruments, engineering survey equipment, marine exploration and monitoring equipment, etc.) that are categorized as encouraged are removed, meaning all the instruments and meters and other machinery equipment of these types should be regarded as encouraged.

4. Alternative and Clean Energy. The construction and operation of several types of large scale power plants using high and clean technologies (e.g. power generation through coal-based integrated gasification combined cycle) are now encouraged. So is the construction and operation of power grids, though foreign ownership in this sector shall not exceed 50%. New energy power plants that use tidal current energy are also encouraged.

5. Transportation. The construction and operation of inter-city or intra-city railways as well as railways in suburban areas or for resources development purposes are now encouraged. Foreign ownership restrictions for the construction and operation of city subways, feeder railways and related bridges, tunnels, ferry and station facilities, design, manufacturing and repair of certain equipment, components and systems relating to aircraft and ships have been removed. Alongside, railway cargo transportation companies and inbound and outbound taxi transportation companies have also been removed from the restricted list.

6. Environmental Protection. The construction and operation of waste water treatment plants have been added to the encouraged list.

7. Service Sector. The development and application of technology for the internet of things and creative industries such as industrial design, construction design and garment design are now included in the encouraged category.

8. Traditional Industries. The planting and cultivation of Chinese herbal medicine is no longer required to be controlled by a Chinese party. The production of yellow wine and premier Chinese white spirit, is now permitted without any restriction on foreign ownership. The processing of green tea and other special tea involving Chinese traditional processes have changed from being prohibited to being permitted.

Increased Regulation

Despite the sweeping changes, there are some industries where restrictions have been imposed or enhanced. For instance, the manufacturing of entire automobiles, special vehicles and motorcycles has become restricted. So is the establishment of higher education institutions and kindergartens. The scope of prohibited mapping and survey activities has also been substantially expanded.

Conclusion

The Consultation Draft was released amid the campaign of the new administration of the PRC government for economic structure adjustment, development mode transformation, less government intervention and more market roles. The scale of the reforms to the FDI Catalogue (eclipsing the added regulation)  reflect the government’s determination to further open up the markets and level the playing field for both Chinese and foreign participants.

Adding to this encouraging move is that the PRC State Council has recently further raised the approval threshold for foreign investment projects in the new version of Catalogue of Investment Projects Subject to Government Review and Approval. Many projects which were previously required to be approved by the NDRC or even the State Council can now be approved by local-level governments.

The official new version of the FDI Catalogue is expected to be released before long and not differ much from the Consultation Draft. Foreign investors, especially those from previously restricted or prohibited industries are sure to be watching this development closely and preparing to enter the market once the final hurdles have been lifted.  

Key Contacts

Jenny Jin

Legal Counsel | Corporate Commercial

Email or call +86 21 6340 3588