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LEGAL: 2011 Amendments to the Foreign Investment Industrial Guidance Catalogue of the People's Republic of China
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The Foreign Investment Catalogue is one of the most important documents that should be reviewed by companies or individuals seeking to invest in China. Due to this importance, both this months' Legal and Policy articles offer perspectives on things to be aware of regarding recent changes to the Catalogue.

altOn December 24, 2011, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) of the People’s Republic of China (PRC) jointly released the new amended Catalogue on Industry Guideline for Foreign Investment (New Foreign Investment Catalogue). This New Foreign Investment Catalogue, which replaces the previous version of 2007, became effective on 30 January 2012.

The New Foreign Investment Catalogue addresses the policies and priorities set out by the National People’s Congress in the 12th Five-Year Plan of March 2011 and reflects the current industrial and macro-economic agenda of the country. Some of the new permitted industries and activities are also in accordance with PRC’s commitments undertaken when it joined the World Trade Organization (WTO) in December 2001.

The new amendments and inclusions confirm the desire of the central government, stated in the State Council Opinions of early 2010, of encouraging foreign investment in high-end manufacturing industries, high and new technology industries, modern service industries as well as new energy, energy-saving and environment protection industries. It seeks to restrict high pollution, high energy consumption and resource dependent projects and low-level and excess expansion projects.

The New Foreign Investment Catalogue inherits the structure of its predecessors and establishes three categories of industries: prohibited, restricted and encouraged. Prohibited are those industries which are closed to foreign investment. Restricted industries have certain constraints, such as more stringent requirements by State or local authorities for approving the establishments of foreign investment entities. Encouraged projects are subject to less strict approval requirements and procedures and sometimes receive custom incentives, taxation deductions, or even financial support. Lastly, industries not included in the catalogue are considered permitted and are open to foreign investment unless specifically prohibited in other PRC regulations.

New Prohibited Sectors

Some sectors have been added to the prohibited category in the New Foreign Investment Catalogue, namely, mail courier services and construction and operation of villas. Both sectors were already prohibited by previous PRC’s regulations and have been included for legal consistency. Postal services were already prohibited by PRC’s Postal Law enacted in 2009 which only allowed China Post and its subsidiaries to provide such services within the PRC. The construction and operation of villas was restricted along with foreign golf course projects by the “Prohibited Land Use Project Catalogue” approved by the Ministry of Land and Resources of the People's Republic of China and the NDRC in 2006.

New Restricted Sectors
Even though the New Foreign Investment Catalogue generally eases requirements for foreign investment, a few activities have been added to the restricted category. The most important examples are the construction and operation of large scale farmers’ markets, grain purchases and the collection and manufacture of alkalescent zinc manganate batteries containing mercury. Moreover, the production of vaccines listed in the state immunization plan now require foreign investors to enter into joint ventures with a local partner and the scope of activities related to the processing of palm, peanut, sunflower and other edible oils, which already required a joint venture, has been widened to restrict the processing of more types of edible oils.

Some restricted activities or industries, although not upgraded to the permitted category, were subject to the easement of foreign participation restrictions, for example, activities of distribution of audio-video products (excluding movies) do not require anymore that the Chinese party in the joint venture be the controlling shareholder, thus allowing foreign investors to hold the majority stake of the share capital.

New Encouraged Sectors
In the New Foreign Investment Catalogue, numerous industries have been upgraded to the encouraged category, mostly relating to green and high technologies and the service industry.

The environmentally-friendly and high-end manufacturing industries have been recognized as key sectors and, therefore, the New Foreign Investment Catalogue stimulates foreign investors to utilize new technologies, manufacturing processes, materials and equipment by adding many related activities to this category. The inclusion of activities such as the manufacture of key parts for new energy automobiles, batteries and the establishment and operation of charging stations, recycling of electrical products waste, automobiles, , and manufacture of energy conserving building materials are some examples of the direction the PRC is taking to encourage high technology and green industries.

The development and opening of the PRC’s service industry is also one of the big objectives set in the 12th Five Year Plan and one of its commitments when entering the WTO. The Chinese authorities are willing to learn from foreign expertise in these sectors and some modern services have been added to the encouraged category including venture capital enterprises, intellectual property services and vocational training, among others.

New Permitted Sectors
New services have been upgraded from more restricting categories as a part of the PRC’s efforts to open up and develop certain markets. Sophisticated services such as financial leasing companies, commercial companies engaging in franchise, commodity auction services or commission businesses have been promoted from restricted to permitted.

The PRC is also opening its medical market. Services in the medical industry, such as medical services institutions or activities of wholesale, retail and distribution of medical products have also been upgraded to permitted category.

The distribution and import of books, newspapers, magazines, and import of audio and visual products was previously prohibited by the PRC’s regulations. This change of policy is a consequence of an arbitration procedure held in 2009 before the WTO. The United States claimed that the PRC was breaching its WTO commitments by restricting these activities to foreign investors. The arbitrators ruled in favour of the United States and, thus, the RPC amended its regulations in accordance to the RPC's trading rights commitments and now such activities are permitted.

Furthermore, in accordance with the intent to promote development and curb overcapacity, certain sectors and industries were downgraded from the encouraged category to permitted such as manufacturing of complete automobiles, polysilicon and coal chemicals.

Relevant regulations affecting new encouraged and permitted industries
Important regulations were also approved regarding the approval procedures of encouraged and permitted activities prior to the New Foreign Investment Catalogue. According to the State Council Opinions of April 2010 and subsequent regulations issued by MOFCOM and NDRC, encouraged and permitted projects by foreign investors with a total investment of less than USD 300 million no longer need to be approved on a State level and can instead be approved by provincial offices. The limit according to the previous regulations was USD 100 million and now, foreign investments under that threshold will find a faster and more flexible approval procedure from local authorities.

Most changes introduced by the New Foreign Investment Catalogue involve an improvement of the conditions which foreign investors are subject to when investing in the PRC. Many industries or sectors have been upgraded to or included in the encouraged and permitted categories which clearly reflect the PRC’s intention to further promote foreign investment in the sectors of advanced technologies, high-end manufacturing, energy conservation and environmental protection. The New Catalogue also reflects recent regulations adopted by the central government in relation to the policies set out in the 12th five-year plan period and the PRC’s commitments when joining the WTO.

Foreign Investors, whether already established in the PRC or considering entering, should pay close attention to the New Foreign Investment Catalogue and related regulations. Already established foreign investors should be aware of the changes introduced since, even though, the catalogue does not have retroactive effects, it can ease or affect its operations when seeking expansion or financing by either requiring further MOFCOM or local approval. New investors also should take into account the New Foreign Investment Catalogue to know beforehand the type of requirements and approvals they will encounter when entering the PRC and learn about new business opportunities that have just arisen.

By Manuel Torres (Partner) & César González Palliser (Senior Lawyer), Garrigues, Shanghai.

Garrigues has over 13 years of experience in advising companies in their investments in China. The team of experienced Western and Chinese professionals at Garrigues Shanghai provides legal advice to foreign companies on a wide range of issues such as incorporation of companies and negotiation of joint ventures, commercial contracting, M&A, tax, real estate, employment, intellectual property, arbitration and infrastructures, as well as to Chinese companies with investments abroad.
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