On April 1, 2011, the PRC National Development and Reform Commission (NDRC) released a draft Foreign Investment Industrial Guidance Catalogue (Draft Catalogue) for public comment. The most recent revision to this important policy paper on foreign investments occurred in 2007. Public comments are invited to be submitted to NDRC by April 20, 2011.

Three Categories

The 2007 foreign investment industrial guidance catalogue provides, similar to its predecessor version promulgated in 2003, a definitive list of industry sectors or technologies that are welcome, unwelcome or even closed to foreign investments. These are typically referred to as categories of encouraged, restricted or prohibited industry sectors/technologies. Those not appearing in any of the three categories are considered “permitted” and are neutral to foreign investments. While investing in an “encouraged” industry/ technology does not necessarily mean the end of all the hurdles and concerns for a foreign investor, it does have some notable benefits, especially in terms of cutting through bureaucratic red tape. Pursuant to a State Council issued “Opinion on Perfecting Work in Utilizing Foreign Capitals (GUOFA [2010] No. 9)” issued on April 13, 2010, the following new policies are provided for projects listed in the encouraged category.

  • Land use price can be reduced to as low as 70% of the local benchmark price.
  • Simplified high and new technology enterprise reorganization proceedures.
  • Expand local governments’ authority to approve investments in and encouraged or “permitted” industries from below US$100 million to below US$300 million in total investments or newly added capital.

NDRC has made it clear that foreign investment in a restricted or prohibited category is unwelcome. In an overarching industrial policy circular promulgated in 2005, NDRC stipulates certain guiding principles that other regulatory agencies and business entities should follow with regard to the restricted or prohibited category. For example, banks are discouraged from giving loans to finance a project that is listed under the restricted or prohibited category. Similarly, government agencies such as the land regulatory agency, state administrations of industry and commerce, environmental protection agency, etc., are instructed not to approve or issue a license to a project or even to provide necessary public utilities to a plant that is considered to be under the prohibited category and is not bringing themselves into compliance. Such seemingly stern measures are not accompanied by penalty clauses and are not always strictly followed by profitdriven state-owned commercial banks or local government especially when economic interests (e.g., tax revenue, employment rates) are involved. This can lead the central government to sometimes take dramatic measures such as the one it took in early 2010, signing accords with over a dozen provincial or municipal governments in which the provincial governors and mayors promised to shut down certain obsolete or high polluting plants in their respective jurisdictions that are listed as prohibited on the national industrial guidance catalogues. The objective was to cut down energy consumption and to reduce emissions to a predetermined level set by the central government.

NDRC justified these actions by saying that encouraged categories have important functions for economic and social development and are conducive to resource conservation, environmental protection, and industrial optimization and upgrading. Conversely, prohibited categories include mainly obsolete techniques, equipment and products which seriously waste resource, pollute the environment and fail to meet safety requirements.

Policy Considerations in Changes

The Draft Catalogue proposes to make deletions and additions to the three categories of industry sector/technologies listed in the 2007 catalogue. Several policy considerations are driving these changes.

  1. The primary policy consideration is in regard to energy saving, pollution control and natural resource and environmental protection. These can be seen in the following newly added encouraged industry sectors.
    • Organic vegetable planting and production technology
    • Energy saving and emission reduction technology in textile dying and processing
    • Environment-friendly and green apparel making techniques
    • Nuclear fuel processing
    • Safe, efficient, and environment-friendly agricultural fertilizer
    • Recycling of construction waste materials, industry by-products and non-metallurgical mining by-products and restoration of the environment
    • Nickel-saving stainless steel
    • Wind power, nuclear power, and high-speed train gear transmission box
    • Air pollution control, industrial waste, and gas and diesel engine emission treatment equipment
    • Waste water treatment equipment
    • Solid waste treatment equipment
    • Recycling of used fabrics, electronic and machinery products, tires, plastics, batteries and scrap steel
    • Portable water treatment and water recycling equipment
    • Ocean oil leak recovery device and oil leak and marine life explosive growth control technologies
    • Electrical car key parts and battery
    • Hydropower generation and storage equipment
    • Green cell battery
    • Renewable energy air conditioning equipment
    • Forest-paper integrated plantation projects (removed)
    • Direct-reduce iron manufacturing (removed)
  2. Another consideration is industry upgrading and technology advancement as reflected in the newly added encouraged category items below:
    • Shell gas and ocean bed natural gas exploration and exploitation
    • Aerospace use of light and environment-friendly new composite materials, development and manufacturing
    • Broad band wireless and other advanced telecommunication technology and related equipment
    • Internet devices based on IPv6 generation and related equipment
    • Industrial detection devices and precise measurement devices
    • Civilian use rocket design and manufacturing (removed)
    • LCD flat panel (sixth generation and/or inferior technology excluded)
  3. Some changes or lack of changes are subject to disputes between PRC and foreign investors and their governments. In the last few years, one of the frequent complaints by foreign companies is that China is shaping its industrial policy to give more protection to PRC domestic companies over foreign invested companies in certain protected sectors. While some of them relate to national security, others arguably are not.  

At least one notable change was proposed that was subject to a hotly contested dispute. In April 2007, the U.S. government brought suit against the PRC government in the World Trade Organization over China’s restriction placed on foreign investments in importing and wholesaling of books, newspaper and periodicals, as well as audio/video products in China. The World Trade Organization ruled against Chinese measures which became an official WTO ruling on January 19, 2010. In the Draft Catalogue, general distribution and importation of these publications and audio/video products are removed from the prohibited category. That means, once the Draft Catalogue comes into effect, foreign invested companies will be able to import into China and sell these products to the general public, which has traditionally been reserved to a few state-owned publishing companies.

  1. Other notable proposed changes include:

The following sectors are added to the encouraged category: rural area logistical supply and delivery, vocational school education. Venture capital and intellectual property services are also added to the encouraged category.

Some notable removals from the prohibited or restricted category include online music stores, leasing financial companies, auction houses and the carbonated drinks industry. These sectors now become “permitted” and are open to foreign investments.

Villa construction and intra-country courier delivery are added to the prohibited category. The latter is an especially thorny issue between global couriers and Chinese companies.