Issue

On April 13, the State Council released updated policy directives for the promotion of foreign investment. The policy directives shed further light upon upcoming changes to the Catalogue for Guidance of Foreign Investment Industries (the “Catalogue”), which were first announced in February 2010. Contrasting the Indigenous Innovation Policy, which has been perceived as threatening foreign interests, the recent State Council release appears to ease restrictions and encourage foreign investment. The new guidelines are to serve as a framework for future legislation and appear to be a direct response to investor concerns expressed in recent opinion letters submitted by various foreign chambers of commerce and other business associations.  

The State Council announcement identifies the following policy changes:

Amendments to Foreign Investment Catalogue

The State Council announcement indicates that upcoming revisions to the Catalogue will include expansion of foreign investment opportunities in high-end manufacturing, hightechnology, the modern service industries, new energy, and projects improving energy efficiency.  

Regional Headquarters and R&D Centers

In order to increase the physical investments of foreign businesses, the State Council announcement encouraged foreign companies to establish regional headquarters, R&D, procurement, finance management, and accounting centers in China. Certain qualified R&D centers will be permitted to take advantage of exemption from customs duties, VAT, and other taxes when importing products necessary for technological development. The announcement also proposes the expansion of the outsourcing in China but provides no details as to incentives or other programs to promote this industry.

Private Equity and M&A

Foreign investors are encouraged to participate in the reorganization and reform of domestic enterprises. Further, the State Council proposes to establish a new, as yet undefined, security examination system for M&A involving foreign investment. In addition, the development of private equity and venture capital funds will be encouraged, including the implementation of improved exit options for foreign capital.  

Access to Chinese Capital Markets

Qualified Foreign Invested Enterprises will gain access to domestic and overseas stock-market listings and will be permitted to issue corporate bonds and negotiable instruments. In addition, access to RMB bond issuance will be expanded for certain offshore entities.  

Focus on Central and Western Regions

In response to the mounting economic disparity between the Coastal and Central/Western regions of China, the State Council seeks to promote better distribution of foreign investment by providing tax and other incentives. Specifically, foreign investors are encouraged to develop labor-intensive industries in Central and Western China. Foreign banks are also encouraged to establish branches in these regions. The State Council indicates that additional special development zones will be established, infrastructure is to be improved, and other measures are to be taken to make these regions more attractive for foreign investment.  

Relaxation of Approval Procedures

The State Council has also indicated that approval procedures and requirements will be softened to facilitate foreign investment. Foreign Invested Enterprise approval procedures and foreign exchange settlement procedures are to be simplified, approval times shortened, and access to electronic filings improved. In addition, most projects with total investments in permitted or encouraged categories below US $300 million will require local government approval only. This substantially raises the previous cap of US $100 million and drastically reduces the regulatory complexity of larger investments. Finally, certain undercapitalized Foreign Invested Enterprises will be granted extensions to allow for capital contributions to bring operations into compliance.  

Fresh perspectives on Indigenous Innovation procurement policies:

Ministry of Science and Technology Modifies Proposed Requirements

In a notice, published April 10, the Ministry of Science and Technology (“MOST”) toned down proposed requirements that foreign products are required to meet in order to qualify for Chinese government procurement. Under the guidelines previously released in November, entities seeking to participate in government procurement had to use Chinese intellectual property and proprietary brands and needed to be entirely independent of overseas businesses or individuals. The amended guidelines simply require that entities seeking to engage in government procurement be legally registered in China (including foreign-invested enterprises), comply with relevant Chinese law, and own the intellectual property and exclusive trademark rights for the product in China. Companies will not be required to demonstrate that their products were developed or first licensed in China. Due to the size and scope of government in China, national procurement policies are particularly important for many companies seeking to do business in China, and the relaxation of the Indigenous Innovation procurement policy is likely to have a positive effect on business outlook in affected sectors.

Conclusions

The almost simultaneous release of the State Council guidelines and amended MOST requirements suggest that the Chinese government is actively seeking to counter recent policy signals that left many foreign businesses and observers concerned about the future of foreign investment in China. The releases do not provide substantial detail or major departures from current practices; therefore they should be viewed more as a political move than a true policy realignment. While investors may find some new limitations in already-saturated areas of the Chinese market, the recent releases may lead to the opening of new areas for foreign investment and provide substantial incentives for foreign businesses seeking to invest in targeted industries or regions.