China’s National Development and Reform Commission and the Ministry of Commerce jointly issued a new catalogue of industries for guiding foreign investment on 28 June 2017. On 16 August 2017, the State Council published measures to further accelerate the increase in foreign investment. These new policies aim to encourage more foreign investment into China by further reducing investment restrictions in specific sectors, and by making the investment climate more foreign investor-friendly. They follow the approach of previous policy on foreign direct investment and continue the trend of opening up the Chinese market to outside investors. Although both developments signal a positive trend with regard to foreign direct investment, we continue to recommend potential investors exercise caution, as China remains a challenging business environment.
2017 Catalogue for the Guidance of Foreign Investment Industries
The Chinese government reduced foreign investment restrictions in China’s free trade zones (FTZs) in June 2017, as reported in the July edition of In context. Following the FTZ development, the Chinese government has now also revised the 2015 Foreign Investment Catalogue by introducing a new nationwide 2017 catalogue. The 2017 catalogue applies to all foreign investments in China outside of the FTZs. This marks the seventh revision since the first publication of the catalogue in 1995.
Like its predecessors, the 2017 catalogue distinguishes between encouraged, restricted, and prohibited sectors. Foreign enterprises investing in encouraged industries enjoy preferential treatment, including incentives granted by local governments to attract foreign investment. The 2017 catalogue also includes a nationwide “negative list” which consolidates the restricted and prohibited sectors and sub-sectors. Certain sectors are listed as both encouraged and restricted (for example, the construction and operation of nuclear power stations or airports). Foreign investment in these sectors is encouraged, but also faces certain restrictions, such as joint venture obligations. For industries other than those listed, foreign investment is treated as “permitted”. Investors in these industries will be treated equally as compared to domestic Chinese investors.
The overall number of restrictions listed in the 2017 catalogue has been reduced from 93 to 63, while the prohibited list has been reduced from 36 to 28 items. The sectors removed from the prohibited list have not, however, been fully opened up to foreign investment, but are rather restricted equally to domestic businesses (for example, the construction of golf courses, or the gambling industry). Similar to changes made to the negative list for FTZs, the majority of reductions in restrictions apply to the manufacturing, mining and service sectors.
The following changes have been made in comparison with the 2015 catalogue:
|Newly-added encouraged sectors||(i) Manufacturing of intelligent emergency medical rescue equipment
(ii) R&D and manufacturing of virtual reality and augmented reality devices as well as design and manufacturing of 3D printing equipment
(iii) Construction of hydrogen refuelling stations
(iv) Manufacturing of hydrologic monitoring sensors
(v) Establishment and operation of urban parking facilities
|“Encouraged investments” may enjoy preferential treatment, including tax incentives or other incentives granted by local governments to attract foreign investment.|
|No longer restricted sectors||(i) Credit investigation and rating service companies
(ii) Accounting and auditing services
(iii) Highway passenger transportation companies and ocean shipping cargo companies
(iv) Mining sector activities, including non-conventional oil and gas (fracking) as well as noble metals
(v) Processing of edible oils, production of biological liquid fuels and construction and operating of agricultural wholesale markets
(vi) Establishment and operation of comprehensive water conservancy projects
(vii) Manufacturing of railway transportation equipment, electric bus network equipment, batteries for new energy vehicles, blade energy vehicles, manufacturing and repair of marine engineering equipment, manufacturing of diesel engines for vessels, design and manufacturing of satellites
|Any industry not restricted will get equal treatment to domestic Chinese investors.
Note: Chinese investors also face restrictions in certain industries, such as telecommunication and education.Although foreign investors in non-restricted areas do not require prior MOFCOM approval, they are still subject to record-filing requirements.
|Less restricted sectors||(i) Manufacturing of motorcycles is no longer subject to the requirement of having an equity joint venture company and the limitation of having two equity joint ventures maximum for the manufacturing of motorcycles has been abolished
(ii) The manufacturing of pure electric cars is exempted from the limitation of a maximum of two equity joint ventures
|“Restricted investments” require detailed review and pre-approval by MOFCOM. Also, tailored conditions may be set such as the requirement of establishing a Sino-foreign joint venture.|
|Newly prohibited sectors||(i) Aerial photography for surveying and mapping purposes
(ii) Editing and publishing of books, newspapers and periodicals
(iii) Editing, publishing, and production of audio-visual products and electronic publications
(iv) Radio, television, video on demand services, and installation of satellite television broadcasting ground receiving facilities
(v) Online public information services
(vi) Humanities and social sciences research institutes
|“Prohibited investments” means foreign investment in those industries is not allowed.|
Notice Regarding Measures to Accelerate Increase in Foreign Investment
In addition to the 2017 catalogue, on 16 August 2017 the State Council published a new notice which includes a series of measures for ensuring the growth of foreign investment by improving the investment climate. These measures, to be implemented by governmental authorities, industry regulators and all provincial governments, have been issued in order to make the foreign investment environment ”more law-based, internationalised and convenient”.
The measures include:
Assessment and outlook
The changes brought about by the 2017 catalogue are in line with the foreign investment changes in the FTZs. Most of the newly liberalised industries are dominated by Chinese companies. Moreover, foreign investment in certain industries still remains conditional on a MOFCOM filing and national security review, allowing Chinese authorities to maintain strong control over foreign investments.
As for the measures announced by the State Council in the new notice, we remain somewhat sceptical. Although the measures obviously decrease restrictions, they are addressed at lower Chinese authorities and still have to be implemented. As such, they do not apply directly to foreign investors. For this reason, we recommend potential investors exercise caution in relying on the new notice – particularly since Chinese authorities have shown in the past that measures contrary to foreign investment – such as the capital control restrictions at the end of 2016 – can be introduced suddenly and without any warning.
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