On November 4th, 2014, the National Development and Reform Commission (“NDRC”) promulgated the Catalogue for Guidance on Foreign Investment Industries (Revised Draft for Comments) (the “Revised Draft”) and released it for public comments. The aims of the Revised Draft are as follows: i) relax market access for foreign investors; ii) change the administration of foreign investment, iii) reduce the number of industries restricted to foreign investment to adjust and optimize the country’s economy and iv) relaxing foreign capital percentage limitations in certain industries. Below is a brief summary of the important amendments in the Revised Draft, along with a comparison of the Revised Draft with the currently effective Catalogue for Guidance on Foreign Investment Industries (Revised in 2011) (the “Current Catalogue”).

The Revised Draft Increases The Number of Encouraged Foreign Investment Industries

In addition to preserving the list of encouraged foreign investment industries in the Current Catalogue, the Revised Draft adds new items to the list, namely the “development and application of unique Internet technology”, “elderly-care institutions”, “industrial design, architectural design, costume design and other creative industries”, and others to the Catalogue of Encouraged Foreign Investment Industries (the “Encouraged Catalogue”). The Revised Draft removed “grid construction and operation” from the Catalogue of Restricted Foreign Investment Industries (the “Restricted Catalogue”) to the Encouraged Catalogue to meet industrial development demands.

The Revised Draft Reduces the Number of Restricted Foreign Investment Industries

In an unprecedented move, the Revised Draft reduces the number of the restricted foreign investment industries from 79 to 35. Doing so removes restrictions on foreign access in certain industries. The most noteworthy modifications are below.

  1. Removing restrictions on foreign investment in industries relating to the “printing of publications” and the “distribution of audio and video products”;
  2. Removing restrictions on foreign investment in the “direct sales, mail order, and internet marketing” industries;
  3. Removing restrictions on foreign investment in the real estate industry “including the development of tracts of land, the construction and operation of high-grade hotels, high-end office buildings, and international exhibition centers, secondary market transactions in real estate, and real estate intermediary or brokerage companies)”;
  4. Removing restrictions on foreign investment in “financial companies, trust companies, currency brokerage companies, and insurance brokerage companies”; and
  5. Removing restrictions on foreign investment in industries relating to “photography services”, “the construction and operation of cinemas”, “the construction and operation of large theme parks”, “performance brokerage agencies”, and “the operation of recreation places”.

The Revised Draft Relaxes Foreign Capital Percentage Limitations in Certain Industries

The Revised Draft significantly reduces, from 43 to 11, the number of the industries where foreign investors are only allowed to operate via a sino-foreign equity joint venture, a sino-foreign cooperative joint venture and/or a partnership venture. The Revised Draft also significantly reduces, from 44 to 22, the number of the industries where foreign investors are allowed to operate, but only if Chinese parties are controlling shareholders. In addition, the Revised Draft further sets forth the qualification requirements for foreign investment in banks and securities companies. The most noteworthy modifications are below.

  1. Removing foreign capital percentage limitations in the E-commerce industry.

Under the Current Catalogue, foreign capital in value-added telecommunications services cannot exceed 50%. The Revised Draft explicitly stipulates that E-commerce is no longer subject to such limitation.

  1. Removing a portion of items in the transportation equipment and electrical machinery manufacturing industries from the Restricted Catalogue, which foreign investors could previously access only through sino-foreign equity joint ventures or sino-foreign cooperative joint ventures, or where Chinese parties had to be the controlling shareholders.

As further examples, foreign investment in industries relating to “the design and manufacturing of air-borne equipment for civil airplanes”, “the design and manufacturing of yachts”, “the manufacturing of power transmitting and transforming equipment”, and others, are no longer required to be made only in the form of sino-foreign equity joint ventures or sino-foreign cooperative joint ventures. Foreign investment in industries relating to “the construction and operation of urban subways and light rails”, “the operation of performances venues”, and others, are no longer subject to the requirement that the controlling shareholders have to be Chinese parties.

  1. Increasing the foreign capital percentage limitation in securities companies.

Under the Current Catalogue the percentage of foreign capital in securities companies cannot exceed one-third. The Revised Draft increases this limitation from one-third to 49%. The Revised Draft further sets forth foreign capital percentage limitations in banks, namely that i) a single overseas financial institution, as a sponsor or as a strategic investor, along with its controlled or joint-controlled affiliates, shall not hold more than 20% of the shares in a single Chinese-funded commercial bank, ii) multiple overseas financial institutions, as sponsors or as strategic investors, along with their controlled or joint-controlled affiliates, shall not hold more than 25% of the shares in a single Chinese-funded commercial bank, iii) amongst all overseas financial institutions, only banking financial institutions can invest in Chinese rural commercial banks.

The Revised Draft Increases and Adjusts Industries Where Foreign Investment is Restricted or Prohibited

While the Revised Draft expands market access for foreign investors by significantly increasing the number of encouraged foreign investment industries, reducing the number of restricted foreign investment industries, and relaxing foreign capital percentage limitations in certain industries, it also places certain newly-emerging industries into the Restricted Catalogue or the Catalogue of Prohibited Foreign Investment Industries (the “Prohibited Catalogue”), and moves certain formerly prohibited industries to the restricted category, and formerly restricted industries to the prohibited category. The most noteworthy modifications are below.

  1. The Revised Draft move the “manufacturing of audio and video products and electronic publications” industry from the Prohibited Catalogue to the Restricted Catalogue, requiring Chinese parties to be the controlling shareholders. The “publication of audio and video products and electronic publications” industry still remains prohibited.
  2. The Revised Draft moves “legal consultancy” from the Restricted Catalogue to the Prohibited Catalogue, and modifies the phrasing of the industry to “PRC legal affairs consultancy”.
  3. The Current Catalogue places the “wholesale, retail, and distribution of tobacco” into the Prohibited Catalogue. The Revised Draft places the “wholesale and retail of tobacco leaf, cigarettes, redried tobacco leaf, and other tobacco products” into the Restricted Catalogue.
  4. The Revised Draft moves the “higher education institutions” industry from the Encouraged Catalogue to the Restricted Catalogue, while adding the “foster education institutions” industry to the Restricted Catalogue. According to the Revised Draft, foreign investment in these two industries is now limited to sino-foreign cooperative joint ventures that are controlled by Chinese parties. The Revised Draft also adds “medical institutions” to the Restricted Catalogue. Foreign investment in medical institutions is now limited to sino-foreign cooperative joint ventures.
  5. The Revised Draft places industries relating to “Internet publishing services” and “heritage auction enterprises and heritage stores” into the Prohibited Catalogue.

It should be noted that the Revised Draft has only been released for comments, meaning it still may be further modified and will be finalized by the NDRC. The Revised Draft predictably provides foreign investors with greater access to the China market to optimize the allocation of international and domestic resources for China. We will keep track of further modifications or updates to the Revised Draft, as well as its formal promulgation into law. We will also timely share with you the latest trends in China’s policies towards foreign investment.