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POLICY: China Releases New Foreign Investment Catalogue (2012 Edition)
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The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly published the Foreign Investment Industrial Guidance Catalogue (2011 Revision) on 24 December 2011, following a draft version issued for public comment in April 2011. The 2011 Catalogue takes effect on 30 January 2012 and replaces the 2007 version Catalogue.
 
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Background

In China, any foreign investment has to fulfill approval requirements before establishment and operation. In order to better regulate and guide foreign investment, the Catalogue was first released in 1995 and has been amended five times respectively in 1997, 2002, 2004, 2007 and 2011. The Catalogue has been a critical element of China's foreign investment regulatory regime and a key indicator of the evolution and shift of industrial policies toward foreign investment in China over the years.

Under the Catalogue, foreign investment in various business activities are classified as encouraged, restricted or prohibited. The "encouraged" category covers industrial sectors in which foreign investors are entitled to greater flexibility of foreign ownership, easier processes of obtaining approvals, and more tax incentives and exemptions from governmental fees. The "restricted" category covers industries in which foreign investment has to meet certain requirements with an ownership ceiling applicable in some cases. Industrial sectors listed under the "prohibited" category are barred from foreign investment. Industries not listed in the catalogue are generally considered to be “permitted”, thus open to foreign investment unless specifically barred under other PRC regulations but not benefiting from specific advantages such as tax incentives.

In line with the State Council Opinions on Further Improving the Utilization of Foreign Investment and the PRC Outline of the 12th Five-year Plan for National Economic and Social Development, the 2011 Catalogue mainly focuses on encouraging development of new and advanced technologies, environmentally-friendly industries, healthcare industries and service industries.
Having been a member of the World Trade Organization for 10 years, China has been taking steps to implement its WTO commitments, including gradually opening up more industries to foreign investors. The 2011 Catalogue reflects such commitment and also shows China's attempt to better use foreign investment for upgrading and optimizing its industrial structure and maintaining national interests in terms of economic priorities in the development of high technology and high-value added industries.

Highlights of the 2011 Catalogue
altThe new Catalogue demonstrates four major changes of China’s industrial policies: (1) To transform and upgrade traditional labor-intensive yet low-value-added manufacturing industry to high-end manufacturing by encouraging foreign investment in new technology, new manufacturing processes, and new equipment; (2) To foster new strategic industries by encouraging foreign investment in energy efficiency, new generation information technology, biotechnology, high-end equipment manufacturing, new and alternative energy, new materials, and alternative energy automobile production; (3) To promote the development of modern service industries by encouraging foreign investment in venture capital investment enterprises, intellectual property services, pollution control/reduction technologies, and vocational and technical training services; (4) To coordinate balanced growth in different regions by promoting the development of western China, and revitalizing the old industrial base of northeast China. In this respect, the Chinese government also issued the Catalogue of Foreign Investment Preferred Industries in Central and Western Regions to implement the differentiated national industrial guidance policies for those areas. It is expected that certain items that have been removed from the encouraged category in the 2011 Catalogue may be considered preferred or encouraged projects when the Chinese central government revises the Catalogue of Foreign Investment Preferred Industries in Central and Western Regions in the future.

“Encouraged” Industries and Activities

 - Under the 2011 Catalogue, new sectors have been added to the "encouraged" category in order to encourage the development of energy efficient technologies (e.g. construction and operation of charging stations and battery changing stations for automotive vehicles) and environmentally-friendly and pollution control industries (e.g. marine oil spill cleanup/control technologies) as well as high-end manufacturing using advanced technologies (including new products/technologies in the production of chemicals and machinery and equipment);
 - Venture capital enterprises have been moved from the "permitted" to the "encouraged" category;
 - Intellectual property service entities have been moved from the "permitted" to the "encouraged" category;
 - Vocational education and training, the manufacturing of key components of new-energy vehicles, production of special textile products with high and new technology and several service sectors such as household/family care services have been added to the "encouraged" category;

Certain sectors such as complete automobile manufacturing and research and development related to the construction of automobiles have been shifted back from the "encouraged" to the "permitted" category. Certain high energy-consumption and high pollution sectors such as polycrystalline silicon (PSC) production and coal chemical processing have also been downgraded from the "encouraged" to the "permitted" category.

"Permitted" Industries

 - Foreign-invested medical institutions, which used to belong to the restricted category in the 2007 Catalogue, are now liberalized by the 2011 Catalogue as permitted sectors for foreign investment. Wholly foreign-owned enterprises are now permitted in this sector;
 - Financial leasing companies are now removed from the "restricted" category and have therefore become "permitted";
 - Carbonated soft drink production has been removed from the "restricted" category and has therefore become "permitted" while the production of wine and liquor remains "restricted";
 - Commercial companies engaging in franchising, commission business and business management and consulting are now in the "permitted" category;
 - Commodity auctions have been moved from the "restricted" to the "permitted" category; and
 - Import and general distribution of books, newspapers and magazines and the import and production of audio/video products and electronic publications have been removed from the "restricted" category and have therefore become "permitted".

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"Restricted" and "Prohibited" Industries

Foreign investment is now prohibited for the following activities:
Domestic express parcel services are now moved from "permitted" status to the "prohibited" category; Foreign investors are not permitted to construct and operate golf courses and villas in China as regulators seek to control housing bubbles; Grain collection and construction and operation of large-scale wholesale markets of agricultural products have been downgraded from "permitted" to the "restricted" category.

Conclusion
The 2011 Catalogue will certainly bring about more opportunities for foreign investors interested in the industries that are now encouraged in the 2011 Catalogue. Foreign investors who are considering their future China investment plan should therefore pay close attention to the new 2011 Catalogue, and the related amendments to its implementation rules and regulations that might follow in the future.



By Simon Bai, Winners Law Firm

WINNERS has been recognised consecutively as "Tianjin Firm of the Year" by two international legal journals: Asia Legal Business from 2008-2011, and by China Law & Practice from 2009-2011.


 
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