Key Points:

  • The Catalogue reflects China’s macro-economic policies
  • Stipulates “encouraged,” “permitted,” “restricted” and “prohibited” categories for foreign investment in China
  • Focus industries include energy and high technology

Initially introduced by the predecessor agencies of the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) in 1995, the Foreign Investment Guidance Catalogue (Catalogue) has played an important role in foreign direct investment in China by stipulating “encouraged,” “permitted,” “restricted” and “prohibited” categories for different foreign-invested projects. Different levels of administration and restriction will be applied depending on the category of a foreign-invested project, according to the Catalogue. From this perspective, the Catalogue plays a large role in China’s market openness and reflects China’s macro-economic policies. The most recent revision to the Catalogue occurred in October 2007.

On April 1, 2011 the Legislative Affairs Office of the State Council published a notice soliciting comments from the public on a proposed revision of the Catalogue, following the State Council’s Opinions on the Further Utilisation of Foreign Investment, issued in April 2010, as well as China’s 12th Five Year Plan, published in October 2010. The draft updates to the Catalogue were open for public comment until the end of April. It is expected that the new Catalogue will be promulgated officially in substantially the same form soon. Hence, this article sets forth the proposed changes to offer a first look to foreign investors interested in the China market.

Following the general trend toward more liberalization, numerous new industries have been added to the encouraged and permitted categories. On the other hand, the revised Catalogue raises the standards for many encouraged industries and removes others (downgrading them to mere permitted status) to emphasize high-technology and value-added production. A summary of the proposed changes follows.

Highlights of the proposed revisions to the 2007 Catalogue include the following.

New Encouraged Sectors

  • China now welcomes more foreign projects within the high-end manufacturing and high-tech sectors. New additions to the encouraged category include: (1) gear transmission manufacturing used for wind power, nuclear power or high-speed rail; (2) design and manufacturing of equipment used for automobile batteries; (3) development and manufacturing of next-generation Internet equipment, terminal equipment, testing equipment, software and chips based on IPv6; and (4) construction and operation of vehicle charging stations as well as battery replacement stations.
  • As a major energy consumer in need of alternative resources, China further encourages foreign participation in unconventional natural gas exploration and exploitation. The 2007 Catalogue encouraged the exploration of only seabed combustible ice, but the new revision adds shale gas to the list. However, only investment in the form of a cooperative joint venture (CJV) is encouraged in this area.
  • Development in respect of energy conservation technologies and recycling of various products (including plastics, electronic products, automobiles, electromechanical equipment, rubber, metal and batteries) have been added to the encouraged category.
  • Participation by foreign investors is now encouraged in the manufacturing of new lightweight and environmentally friendly materials for aviation and aerospace. In the 2007 Catalogue, only automobiles and motorcycles were encouraged.
  • Manufacturing of key components and parts for new energy automobiles (foreign investment capped at 50 percent) has been promoted from permitted to encouraged, including high-energy batteries, anode battery materials, battery separators, battery management systems, motor management systems and electronic control integration of electric vehicles. The manufacturing of complete vehicles and the establishment of automotive R&D organizations have been removed from the encouraged category, showing the shift in China’s interest in this field.
  • Venture capital enterprises have been upgraded from permitted to encouraged, a clear sign of China’s intention to encourage foreign investment in this sector.
  • Intellectual property service institutions are upgraded from permitted to encouraged.
  • Vocational education and training are now encouraged.

New Permitted Sectors

  • As part of China’s efforts since its ascension to the WTO to gradually open its financial services sector to foreign investment, financial leasing companies are upgraded from restricted to permitted.
  • Commodity auction services are upgraded from restricted to permitted.
  • Manufacturing of containers is upgraded from restricted to permitted.
  • Manufacturing of carbonated soft drinks has moved from restricted to permitted.
  • Commercial companies engaging in the franchise or commission business or business management are upgraded from restricted to permitted. Conversely, commercial companies engaging in mail-order or direct or online sales will remain in the restricted category.
  • Medical service institutions are promoted to permitted from the restricted category; in the 2007 Catalogue, such institutions were allowed only in the form of an equity joint venture (EJV) or CJV.
  • Distribution and importing of books, newspapers and magazines and importing of audio and visual products and electronic publications are upgraded from prohibited to permitted.

New Restricted Sectors

  • The manufacturing (only in the form of a CJV or EJV) of wheeled cranes weighing less than 500 tons and caterpillar cranes weighing less than 600 tons is now restricted.
  • The manufacturing of pigment using outdated processes is restricted.
  • The manufacturing of inorganic salt using outdated processes and causing serious pollution to the environment is restricted.

New Prohibited Sectors

  • Mail courier services within China have been moved from permitted to prohibited.
  • Consistent with the Chinese authorities’ efforts to cool the real estate market, construction of villas has been downgraded to prohibited from restricted.

On April 25, 2011 the NDRC also promulgated its new Industry Structure Adjustment Guidance Catalogue, which is that guide’s first amendment since its publication in 2005. The NDRC catalogue sets forth a basis for the country’s overall investment policy including domestic and foreign investment, import and export, finance and taxation, and real estate. Not surprisingly, the NDRC’s industry structure guide catalogue reflects a policy direction similar to that presented in the Catalogue.