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CBR May-June 2008 - Healthcare
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China Market Intelligence

China's 2007 Foreign Investment Guide

China recently revised its Catalogue Guiding Foreign Investment in Industry to bring foreign investment in the country into closer alignment with the government's policy goals. PRC policymakers have long used the catalogue to manage and direct foreign investment. Similar to the 2002 and 2004 editions, the 2007 catalogue divides industries into three basic categories: encouraged, restricted, and prohibited.

Foreign-invested enterprises (FIEs) in encouraged industries are often permitted to establish wholly foreign-owned enterprises (WFOEs). They are also generally eligible for investment incentives, although China is currently adjusting many preferential policies for foreign investment, particularly tax-related policies. Industries in the restricted category may be limited to equity or contractual joint ventures, in some cases with the Chinese partner as the majority shareholder. Restricted category projects are also subject to higher-level government approvals. Industries in the prohibited category are closed to foreign investment. Industries not listed in the catalogue are generally open to foreign investment unless specifically barred in other PRC regulations.

The revisions present a mixed bag for investors—some industry sectors will see more support and openness, while other sectors will find ownership or other restrictions on new investments. The PRC National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly issued the catalogue, which took effect December 1. The revised catalogue affects new investments approved after its implementation date; the revisions should not affect existing FIEs, according to US-China Business Council conversations with senior PRC officials.

Highlights of the 2007 catalogue

The 2007 catalogue reflects the PRC government's current policy priorities. In the notice on the release of the catalogue, NDRC and MOFCOM list five major policy objectives for the catalogue:

  • 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 less-developed western, central, and northeastern regions; and
  • To protect "national economic security" and only cautiously open sensitive and strategic industries to foreign investment.

These priorities are reflected in some of the catalogue's major changes. For instance, more environmental and energy-saving technologies appear in the encouraged category. New to the catalogue, high-end services sectors—such as logistics and business process outsourcing—have been added to the encouraged category. Significantly more-specific and later-generation technical criteria appear in the encouraged machinery manufacturing sectors. Finally, a general provision that automatically qualified any FIE that exported 100 percent of its production as encouraged has been removed, reflecting recent policies to curb export processing growth.

In addition, certain sectors with significant foreign investment—such as chemicals, auto parts, and edible oil processing—face new restrictions, and long-standing prohibitions on media-related industries—such as print and publishing, film and TV production, and Internet content—remain firmly in place.

Also of note—the catalogue does not make any new openings beyond China's World Trade Organization (WTO) commitments. Areas such as financial and telecom services remain almost entirely unchanged, for instance.

WTO compatibility

Many foreign companies have been analyzing whether the catalogue complies with existing trade and investment agreements that China has made, most notably its WTO accession documents. The central government's use of a catalogue to detail areas open to foreign investment does not inherently violate WTO commitments. Investment is only covered by the WTO insofar as it affects trade in goods and services; investment issues are usually addressed through bilateral investment treaties.

The 2004 revision brought many elements of its catalogue into line with China's WTO commitments. Many of China's specific WTO commitments in services are reiterated in the 2007 catalogue. For example, China committed in its accession agreement to allow WFOE real estate companies to manage "luxury" hotels but maintains restrictions on foreign real estate companies managing "high-standard" hotels ("high standard" is not defined). The 2007 catalogue continues to restrict foreign investment in high-standard hotels and does not mention luxury hotels, meaning that foreign investment is permitted. In financial services, WTO-consistent equity caps on foreign ownership of financial firms—including life insurers (50 percent), securities companies (33 percent), and fund management companies (49 percent)—remain unchanged in the 2007 catalogue. Foreign investment in medical facilities continues to be limited to joint ventures, also part of China's WTO commitments.

Several areas of the 2007 catalogue are unclear, however. For example, the catalogue maintains restrictions on the extent to which foreign companies may provide value- added and basic telecom services, which is consistent with China's WTO commitments. But the catalogue also prohibits foreign investment in some Internet-based services. Since China's WTO commitments do not specifically mention Internet-based services, which many companies consider a telecom service, it is unclear whether the prohibition on foreign companies providing Internet- based services is WTO-inconsistent.

Distribution is another area that needs clarification. Since December 11, 2006, China has allowed WFOEs to engage in wholesaling of certain products, such as vegetable oils, autos, and chemical fertilizers, in accordance with its WTO commitments. The 2007 catalogue appears to reiterate restrictions from earlier editions of the catalogue that limit wholesaling of these products to majority Chinese-controlled joint ventures. If this is the case, then such a restriction would violate China's WTO commitments.

Translations of the 2007 catalogue

China has posted both the original catalogue in Chinese (www.ndrc.gov.cn) and its English translation (www.fdi.gov.cn).

USCBC members can access a more detailed version of this article, as well as an unofficial translation that shows changes between the 2004 and 2007 catalogues, at www.uschina.org.




This article is adapted from news reports that first appeared in China Market Intelligence, the weekly members-only newsletter of the US- China Business Council, publisher of the CBR.

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