On April 10, 2015, the latest Catalogue for the Guidance of Foreign Investment Industries 2015 (the “2015 Catalogue”) came into effect and marks the sixth round of revisions since its predecessor was first issued in 1995. This guidance catalogue divides business sectors into “Encouraged”, “Permitted”, “Restricted” and “Prohibited” categories and reflects the PRC government’s regulatory objectives with respect to the then prevailing economic conditions.

The 2015 Catalogue represents the most significant change up to date by substantially easing restrictions on foreign investments and granting broader market access to foreign investors. A substantial portion of the changes mirror the opening­up policies piloted in the Shanghai Free Trade Zone (the “Shanghai FTZ”) for nationwide implementation.

Overview

The number of industrial sectors previously restricted to foreign investors has been substantially reduced from 79 to 38. The number of industrial sectors that must be invested using “equity joint ventures (the “EJVs”)” or “cooperative joint ventures (the “CJVs”)” has been reduced from 43 to 15, and that subject to “controlling Chinese shareholders” has shrunk from 44 to 35. In addition, 76 industrial sectors in the encouraged category have been revised with a view to encouraging the use of new technologies, new materials and equipment in foreign investment projects.

Changes to Specific Industries

Major changes with respect to specific industries are highlighted as follows:

Medical

The last decade has seen a trend of relaxing the regulatory scrutiny for foreign investments in medical institutions. For example, foreign investments in “medical institutions (subject to EJVs or CJVs)” was in the restricted category in 2007 but was later re­categorized as “permitted” in the 2011 Catalogue. More specifically, the maximum foreign ownership ratio in this sector was increased from 30% to 70% in 2000 and medical institutions in the form of wholly foreign­owned enterprises (or “WFOEs”) were later allowed in the Shanghai FTZ in 2013. Since 2014, foreign investors have been allowed to set up wholly­owned medical institutions in seven additional provinces/cities, namely Beijing, Tianjin, Shanghai, as well as in Jiangsu, Fujian, Guangdong and Hainan provinces.

However, the 2015 Catalogue has taken an unexpected turn and restored “medical institutions” to the restricted category and requires that such projects must take the form of EJVs or CJVs. It remains to be seen how the 2015 Catalogue will be implemented in Shanghai FTZ and the seven provinces and cities that already have opened up for medical institutions wholly­owned by foreigners. On the other hand, the 2015 Catalogue continues to encourage foreign investments in elderly­care facilities to cope with Mainland China’s aging population. Indeed the Ministry of Commerce and the Ministry of Civil Affairs had jointly promulgated regulations in late 2014 to encourage foreign investors to set up for­profit retirement organizations in the forms of WFOEs, EJVs or CJVs and provide guidance on the establishment requirements and procedures.

Telecommunications and Internet

In general, the PRC government remains positive to the development of new businesses such as the internet industry. The 2015 Catalogue removes both “online sales” and the foreign ownership restriction in e­commerce business, following the earlier move in the Shanghai FTZ in January 2015. Foreign investors are now able to establish 100%­owned subsidiaries in the PRC on a nationwide basis to operate e­commerce platform business. Yet, foreign investors are still restricted from owning more than 50% in value­added telecommunications businesses.

Education

Contrary to the liberalization trend in other industries, more stringent requirements are now imposed on the education industry. Whereas the 2011 edition only restricts foreign investments in senior high schools education, the 2015 Catalogue has extended the restriction to both higher education and pre­school education institutions. These institutions can only be set up as CJVs dominated by Chinese shareholders, namely the principal or chief executive officer of the school must be a Chinese citizen and at least 50% of the members of the board of governors, board of directors or joint management committee of the school must be Chinese. These requirements are also applicable to senior high school education now.

Real Estate

To curb the then overheated real estate speculation, foreign investors were previously restricted from undertaking different types of real estate investment, including (i) the development of tracts of land (subject to EJVs or CJVs), (ii) the construction and operation of high­end hotels, high­end office buildings and international exhibition centers, and (iii) real estate intermediary or broker companies. The 2015 Catalogue removes all these sectors from the restricted category. However, starting from 2006, the PRC government has promulgated various regulations and rules restricting foreign investments in the PRC real estate market which remain legally binding. It remains to be seen how soon those restrictive regulations and rules will be amended or repealed in the wake of the 2015 Catalogue.

Related Developments and Outlook

As we noted in the February issue of Know Your Counsel, the draft PRC Foreign Investment Law ­ released for public comments in January 2015 ­ already proposed a “negative list approach” to regulate foreign investments, similar to what is currently implemented in the Shanghai FTZ. The 2015 Catalogue might very well become the final edition of the Foreign Investment Catalogue when the draft law is formally enacted in the near future.

As a further step towards a more unified and liberal approach regarding foreign investments, the PRC State Council promulgated on April 8, 2015 a more streamlined negative list applicable to the Shanghai FTZ and the three newly approved free trade zones in Guangdong, Tianjin and Fujian. Also promulgated on the same day was a new set of rules expanding the scope of “security review” from foreign­related M&A activities to greenfield investment projects in the four FTZs, as well as rules governing the recordal of foreign­invested enterprises in the FTZs to carry on businesses that fall outside of the “negative list” and hence not subject to the PRC governmental approvals. All these will become effective on May 8, 2015.