On March 13, 2015, the National Development and Reform Commission of the People’s Republic of China (the “NDRC”) and the Ministry of Commerce of the People’s Republic of China jointly issued a 2015 amendment (the “2015 Amendment”) to the Foreign Investment Industrial Guidance Catalogue (the “Catalogue”). Since 1995, the Catalogue has been a cornerstone in the regulatory regime governing foreign investments in China. The Catalogue divides the Chinese economy into four categories for foreign investments: encouraged, restricted, prohibited and permitted. The permitted category is a catch-all category: industries that are not included in the Catalogue are permitted for foreign investments. The Chinese government updates the Catalogue periodically to guide foreign investments into China and set the tone for China’s national economic and industrial reform. The 2015 Amendment is the sixth amendment made to the Catalogue and carries perhaps the most significant changes to date. The current version of the Catalogue was last amended in 2011 (the “2011 Amendment”). We summarize below some of the more salient changes.
Restricted Industries Significantly Reduced
The 2015 Amendment significantly reduces the number of industries that are “restricted” to foreign investments. As compared to the 2011 Amendment, the new list has shrunk from 79 items to 38 items, representing a removal of more than half of the formerly restricted industries. At a recent press conference, certain officials of the NDRC indicated that, in the future, the Chinese government will rely more on market forces to regulate the relevant industries. Industries that can be regulated through energy-saving, environmental protection, technology and safety measures which are applicable to both domestic and foreign investment projects are no longer included in the Catalogue under the “restricted” category. This is a welcome change and suggests that the “reform and opening” agenda in China continues to tilt toward a more market-based economy.
Foreign Ownership Limitations Further Relaxed and Clarified
The 2015 Amendment further relaxes the foreign ownership limitations on certain industries. Specifically, as compared to the 2011 Amendment, industries that require “Sino-foreign joint venture or cooperation” have been reduced from 43 items to 15 items, and industries that require “majority Chinese ownership” have been reduced from 44 items to 35 items. As a result, a relatively significant number of industries that are currently subject to foreign ownership limitations will no longer be subject to such limitations. Examples of such industries include e-commerce, franchise operation, subway construction, oceanic transportation, steel manufacturing, and auto electronic integration systems.
More importantly, by delineating all foreign ownership limitations in the Catalogue, the Chinese government has attempted to improve the transparency of its foreign investment policies. Under the current regime, the Catalogue lists foreign ownership limitations for some, but not all, industries. Certain foreign ownership limitations are defined instead by the relevant industry-specific regulations. This has created confusion among foreign investors, and requires considerable effort on the part of foreign investors to navigate a complex web of industry-specific regulations in order to understand the foreign ownership limitations relevant to a specific investment project. We expect that the 2015 Amendment will lead to a better understanding of the regulatory regime governing foreign investments and facilitate decision-making by foreign investors.
Encouraged Industries Slightly Revised and Expanded
The number of “encouraged” industries remains largely unchanged in the 2015 Amendment. However, 76 encouraged items have been amended with an apparent aim of optimizing the industrial structure and elevating China’s place in the global value-chain. The 2015 Amendment’s general policy encourages increased R&D activities and the adoption of new technologies, methods, materials and equipment. A handful of industries have been added to the “encouraged” category, which includes, among others, industrial design, construction design, garment design, development/application of the Internet of Things (IOT) and senior-care facilities.
The promulgation of the 2015 Amendment signals the Chinese government’s continuing efforts to open up more sectors of the Chinese economy to foreign investment and to streamline the regulatory regime governing foreign investments in China. The 2015 Amendment will become effective on April 10, 2015. Foreign investment projects that are approved and registered before April 10, 2015 would still be subject to the 2011 Amendment. However, foreign investors who are contemplating new investment projects should consider whether to take advantage of the liberalization reflected in the 2015 Amendment.