China’s State Council has announced a plan to revise the Catalogue Guiding Foreign Investments in Industry (the “Catalogue”). According to the State Council notice, China intends to open more sectors to foreign investment and will target high-technology, modern services, new energy, and environmental protection. It will also encourage foreign companies to merge with or acquire Chinese enterprises.

The Catalogue is a tool used by Chinese policy makers to steer foreign investment to targeted industries. It divides various industries into four categories: encouraged, permitted, restricted, and prohibited. One effect of such categorization is the imposition of limitations on the form of foreign investment. For instance, investment in restricted industries may be limited to joint ventures with Chinese majority partners whereas investment in encouraged industries may allow investors to establish wholly foreign-owned enterprises. In addition, restricted industries are often subject to more complex regulatory schemes and may demand higher-level government approvals.

During the last revisions of the Catalogue in 2007, the National Development and Reform Commission (“NDRC”) and Ministry of Commerce (“MOFCOM”) listed five major policy objectives:

  • To encourage foreign investment while improving the overall quality and industrial composition of investment projects, particularly in high-tech sectors;  
  • To encourage investment in environmentally friendly and energy-saving technologies;  
  • To curtail and eliminate policies that “solely” serve to promote exports, to address China’s trade surplus;  
  • To encourage balanced development between the relatively prosperous coast and the lessdeveloped western, central, and northeastern regions; and  
  • To protect “national economic security” and only cautiously open sensitive and strategic industries to foreign investment.

Reflecting these policy objectives, the 2007 version of the Catalogue includes significantly more environmental and energy-saving technologies under the encouraged category. Further, fledgling services sectors, such as logistics and business process outsourcing, were added to the Catalogue as encouraged industries; while new restrictions were placed on certain sectors with historically significant foreign investment, such as the chemical and automotive industries.

In addition, the 2007 Catalogue reversed a long-standing policy favoring businesses devoted solely to export and industries with high demands for natural resources. New to the list of restricted industries were toy, clothing, and shoe manufacturing, as well as the steel, aluminum, paper, and cement industries.

The 2007 revisions evidence substantial changes in the economic policy of Chinese central government and reflect many of the goals and strategies under the Chinese 11th Five-Year Plan on Utilization of Foreign Investment.

It can be expected that the proposed revisions in 2010 will also be affected by the recent changes in the economic policies of Chinese government. Especially, we note that to cope with recent economic crisis and difficulties in China, the State Council has issued a series of policies to adjust the current structure of Chinese industries and to improve the Chinese economic condition. These policies may also have an impact on the proposed 2010 revisions to the Catalogue.