Foreign investment projects in the People’s Republic of China (“PRC”) are approved on a case-by-case basis. The approval is principally driven by the “Three Laws on Foreign Investments”: the Sino-Foreign Equity Joint Venture Enterprise Law (“Equity Joint Venture Law”), the Wholly Foreign Owned Enterprise Law (“WOFE Law”), and the Sino-Foreign Cooperative Joint Venture Enterprise Law (“Cooperative Joint Venture Law”).
In practice, regulators look to official catalogues to help them make their case-by-case determinations with respect to foreign investments. The “Catalogue of Industries for Guiding Foreign Investment” and the “Mid-West Region Catalogue” (the “Catalogues”) are comparable to the regulatory port of entry into China’s marketplace for foreign investments. Potential investment opportunities at port are divided by the Catalogues into four categories for in-processing: (i) encouraged investments, (ii) permitted investments, (iii) restricted/conditioned investments (e.g., requiring joint venture with a Chinese party), and (iv) investment projects prohibited from entry into China’s market. Additionally, the Shanghai Free Trade Zone adds a layer of complexity to China’s foreign investment opportunities by experimenting with a “negative list” of prohibited sectors leaving all others permissible within the Zone. This is meant to offer a degree of freedom for foreign investors in theory, but its results are still too early to be seen.
The Catalogues are moving targets. China’s regulatory authorities continue to carefully open up some sectors of its economy to foreign investments and close some to adjust to its sovereign agenda. For example, China recently moved higher education institutions from the encouraged investment list to the restricted list and added emphasis on Chinese Party control in this sector. Similarly, China now prohibits investment into its legal advisory sector. Other significant changes include the addition of creative industries (technology, architecture and clothing design) to the encouraged list; the addition of construction and power grid industries to the encouraged list; and loosening certain real estate and e-commerce restrictions for foreign investments. Interestingly, elder care investments are now highly encouraged with tax treatment equal to domestic investors. Wholly owned foreign enterprises (WOFEs) also can be formed now in China to plant and cultivate traditional Chinese medicinal herbs. These changes together make an interesting conversation about supply and service quality control and healthcare management in a very demanding but opportunistic sector in China’s economy.
For a more in-depth discussion on China’s regulatory developments on foreign investment, please see Jun He’s Bulletin on Foreign Investment: http://www.junhe.com/images/ourpublications/Bulletin/Bulletin_EN/20150205_01.pdf.