China is the second largest global recipient of foreign direct investment, behind only the United States. As it continues to expand trade opportunities, the Chinese government has proposed a series of new regulations and guidance that could eliminate some of the restrictions imposed on foreign investors. Accordingly, investors and project developers, including those in the U.S., may have new opportunities to capitalize on a more open Chinese market, if they are not doing so already.
THE CHINESE GOVERNMENT ENCOURAGES MORE FOREIGN DIRECT INVESTMENT IN DOMESTIC PROJECTS
In June 2012, the Chinese government published a special plan as part of its overall 12th Five-Year Plan for the time period 2011-2015. In this special plan, the Chinese government outlined its business strategy for developing and expanding seven strategic industries, including energy efficiency technologies, water resource protection technologies, alternative energy, and new hybrid electric and all-electric vehicles. The other industries include next-generation information technology, biotechnology, and high-end manufacturing equipment.
The China GreenTech Initiative, in partnership with PricewaterhouseCoopers, released a 2012 greentech growth report in May. The report’s conclusions aligned with the Five-Year Plan, finding that China’s long-term development and need for cleaner alternative energy and environmental technologies is expected to accelerate despite macroeconomic uncertainties. By expanding the strategic environmental and energy industries, China has cleared a path to meet its development needs.
In accordance with the 12th Five-Year Plan, the strategic industries were added to the “encouraged” foreign investment category in the revised Catalogue of Industries for Guiding Foreign Investment (2011 Revision) (“2011 Catalogue”), which was published in late 2011 and took effect in early 2012. The 2011 Catalogue, jointly released by the Chinese Ministry of Commerce and the China National Development and Reform Commission, is a Chinese government instrumentality for promoting and directing foreign investments in China. Like prior catalogues, the 2011 Catalogue divides foreign investment projects into four categories: (1) encouraged; (2) permitted; (3) restricted; and (4) prohibited. Consistent with China’s 12th Five-Year Plan which improved market access, the 2011 Catalogue increases the number of “encouraged” foreign investment projects while reducing the number of “restricted” and “prohibited” industries.
The 2011 Catalogue shifts the emphasis towards high-tech research and development, high-end manufacturing, and “green” industries. For example, new additions to the “encouraged” industries category focus on environmentally-friendly technologies, products and services. These include energy-saving and energy-efficiency technologies and products, including new building materials; environmentally-friendly “green” products and sustainability projects, such as projects for the manufacture of air pollution control technology and recycling construction wastes; new energy vehicle projects, such as advanced batteries and vehicle charging stations; projects for improved wastewater treatment; technologies for cleaning up marine oil pollution; and projects utilizing new energy sources, such as wind turbine components, sub-ocean natural gas, and oil shale. Although the “encouraged” classification does not provide an investor with any special benefits, Chinese government support for projects in this classification may translate into a more efficient project approval process.
The Chinese government is also encouraging investment in China’s water treatment market. The Chinese water treatment market is expected to double to $50 billion USD from 2011 through 2015, making it the world’s largest. Further, the government recently announced that it intends to invest $636 billion through the year 2020 in projects to harness water and prevent water-related disasters. The Chinese water treatment market is largely decentralized, regionalized, and dependent on foreign investment in new technologies.
One way the Chinese government is seeking to develop advanced water technologies is through the Sino-Israel Water Industrial Park in Guangdong Province, which is expected to serve as a gateway for Israeli and western companies to enter and invest in China’s water market. The Water Industrial Park will consolidate a number of integrated components, including research and development space, office buildings, an emerging technology incubator, an exhibition hall and education center, an industrial area for laboratory and pilot testing, and living residences.
THE CHINESE GOVERNMENT IS OPENING THE DOOR TO FOREIGN DIRECT INVESTMENT THROUGH CURRENCY EXCHANGE
The Chinese government is also encouraging foreign direct investment through the internationalization of its own currency - the Renminbi (“RMB”). In 2011, the People’s Bank of China and the Ministry of Commerce promulgated the Administrative Measures on Renminbi Settlement for Foreign Direct Investment (“RMB Settlement Measures”) and a Notice on Issues Concerning Cross-Border Direct Investment in RMB (“Notice”). Both measures were viewed as major steps in relieving the tight government strictures over cross-border currency movement, and encouraging inbound investment.
Due to these measures, foreign entities can now directly invest in Chinese mainland projects using China’s own currency. This offers several advantages to investors, including additional currency options, more investment channels, exchange rate fluctuation risk avoidance, and savings on currency exchange cost.
However, certain restrictions on RMB foreign direct investment still exist. The RMB-dominated investments must be in “lawfully-obtained” offshore RMB, meaning currency obtained through cross-border trade settlement, dividend distributions, share transfer proceeds, capital reductions, liquidation processes, issuances of RMB denominated bonds and shares, and other lawful channels. Further, RMB can not be used to acquire certain negotiable securities or financial derivatives.
THE SHANGHAI STOCK EXCHANGE PROPOSAL TO CREATE THE INTERNATIONAL BOARD TO ATTRACT FOREIGN INVESTMENT
Also in 2011, the Shanghai Stock Exchange proposed to form the International Board, a regulatory body charged with attracting offshore investment companies to enter the Chinese securities market and provide high-yield domestic companies with more financing resources. In May 2011, the China Securities Regulatory Commission announced that issuing measures, trading rules, listing rules, and settlement rules of the International Board had been drafted; however, no timetable was set for launching the Board. Recently, it was reported that the launch was delayed again due to legal, systematic, technical, and social issues. Chinese officials insist, however, that studies and preparations for a final launch have been on-going.
In its attempt to become a global financial center, Shanghai has sought to allow the trading of foreign equities to broaden options for the nation’s 85 million individual investors who are restricted from buying shares abroad by Chinese capital controls. For the first time, the formation of the International Board would allow foreign issuers to sell shares to Chinese investors on the mainland.
Through the issuance of several regulations and guidance in 2011 and 2012, the Chinese government has expressed interest in creating a more conducive environment for foreign investment. These actions may further open Chinese markets and investment opportunities, extend investment channels, and facilitate RMB financing and settlement, thus further stimulating the development of the Chinese domestic capital market.