China Issues New Foreign Investment Industrial Guidance Catalogue

Recently the Chinese government issued the new Foreign Investment Industrial Guidance Catalogue (2011 Amendment) in an effort to further liberalize the market entry for foreign investors and improve foreign investment structure and development in certain sectors and regions.

China’s National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly promulgated the new Foreign Investment Industrial Guidance Catalogue (2011 Amendment) (the New Catalogue) on 24 December 2011.  The New Catalogue, approved by the State Council, will come into effect 30 January 2012, and the existing catalogue—as amended in 2007 (the 2007 Catalogue)—will simultaneously expire and become void.

Initially issued in 1995, and subsequently revised several times by the NDRC and MOFCOM, the New Catalogue is consistent with the Chinese government’s strategy to open up China’s market to foreign investors, and serves as a basic guide for foreign investors by categorizing industries into “encouraged”, “restricted” or “prohibited” categories.  Any industry not so classified is deemed “permitted”.

The two prevailing themes in the New Catalogue are: expanding access to foreign investors and relaxing restrictions on foreign investment, and improving foreign investment structure and promoting development in certain sectors and regions.

The major adjustments and changes brought by the New Catalogue are summarized below.

Opening up the Chinese Market Further to Foreign Investors

China has been a member of the World Trade Organization (WTO) for a decade, and subsequently has developed its economy into the second largest in the world.  While enjoying the benefits and rights of WTO membership, China is also taking steps to realize its various WTO commitments, including gradually opening up its market in more industries to foreign investors.

In furtherance of the considerable relaxation of restrictions by the 2007 Catalogue on foreign investments in commercial services, finance and various forms of manufacturing, the New Catalogue expands the encouraged category to include certain high-end manufacturing industries and strategic new sectors.  At the same time, it reduces restricted and prohibited items, which will have the effect of creating a more open market for foreign investors.

Moreover, the New Catalogue removes the restrictions on “foreign investment proportion” (shareholding percentage) in several sectors.  As a result, the number of items with limited foreign investment proportion is reduced by 11 when compared with the 2007 Catalogue.

Promoting the High-end Manufacturing Industry

In order to reform and upgrade China’s traditional manufacturing industry by encouraging foreign investors to utilize new technologies, manufacturing processes, materials and equipment, the New Catalogue recognizes the high-end manufacturing industry as a key encouraged sector.  As a result, new products and technologies in textile, chemical and machine manufacturing industries have been added to the encouraged category in the New Catalogue.

Meanwhile, in accordance with the intent to promote the healthy development of and curb overcapacity within certain sectors, several industries, including whole automobile assembly manufacturing, polysilicon and coal chemical, have been removed from the encouraged category in the New Catalogue.

Fostering Strategic New Industries

To keep up with the rapid development of strategic new industries worldwide that has occurred over the past few years, the New Catalogue echoes the strategic development goals set forth in China’s 12th Five-Year Plan by classifying strategic new industries as encouraged items for foreign investment.  Industries such as key parts for new energy vehicles and next-generation internet system equipment (based on IPv6) appear in the encouraged category of the New Catalogue for the first time, while the foreign investment proportion restriction on new energy power generation equipment has been removed, signaling to foreign investors that China will seize this opportunity to reform the structure of its domestic industries by encouraging foreign investment in energy-saving projects, environmental protection, the latest information technology, biology, high-end device manufacturing, new energy and materials, and new energy vehicles.

Promoting the Development of the Service Industry

China is witnessing a reform in its domestic economy structure, and the Chinese government has attached great importance to the development of China’s service industry.  The New Catalogue encourages foreign investors to invest in the modern service industry, and nine new items have been added to the encouraged category, including motor vehicle charging stations, venture capital enterprises, intellectual property service and marine oil pollution clean-up service, as well as vocational training.

In addition, foreign invested medical institutions and financial leasing companies, which used to belong to the restricted category in the 2007 Catalogue, are now liberalized by the New Catalogue as permitted sectors for foreign investments.

Coordinating the Development in Different Regions

Promoting the development of western China, revitalizing the old industrial base in northeast China and promoting the economic rise in central China have all been part of a long-term strategy of the Chinese government to achieve balanced growth and make full use of local resources in different regions.  In conjunction with earlier versions of the New Catalogue, which generally applied to the coastal and more developed regions of China, the Chinese government also issued the Catalogue of Foreign Investment Preferred Industries in Central and Western Regions to implement the differentiated national industrial guidance policies for those areas.  It is expected that certain items that have been removed from the encouraged category in the New Catalogue may be considered preferred or encouraged projects when the Chinese central government    revises the Catalogue of Foreign Investment Preferred Industries in Central and Western Regions.

Implications for Foreign Investors

The New Catalogue will certainly bring about more opportunities for foreign investors interested in the industries that are now encouraged in the New Catalogue.  However, until the implementation rules and regulations governing foreign investment in specific sectors are amended accordingly, it remains to be seen how soon the changes in the New Catalogue will actually be enforced.  Foreign investors who are considering their China investment plan should therefore pay close attention to the New Catalogue, and the related amendments to its implementation rules and regulations