The Seventh Revision: :
Catalogue for Guidance of Foreign Investment Industries
By Manuel Torres (Managing Partner of Garrigues China), Lucy Luo (Principal Associate), Echo Shen (Corporate Associate)
On December 7th, 2016, National Development and Reform Commission ("NDRC") and Ministry of Commerce ("MOFCOM") jointly issued the Revised Draft of the Catalogue for the Guidance of Foreign Investment Industries (in Chinese: "外商投资产业指导目录（修订稿）") ("Draft Catalogue"), seeking public comments. It is the seventh revision of the Catalogue for the Guidance of Foreign Investment Industries ("Catalogue") since its initial promulgation in 1995.
The Catalogue is a fundamental legal document guiding the entry of foreign investment into China. This revision was actually issued following the recent reform of foreign investment approval system. The Draft Catalogue also shows opening of significant number of markets that are currently subject to restrictions of entry. Listed as follows are the main highlights of the Draft Catalogue -
1. Structural change to the Catalogue
The Draft Catalogue has changed the structure adopted in all previous versions. It has consolidated the restricted industries, prohibited industries and industries listed in the encouraged category with equity requirements or senior manager requirements into one sector, the special administrative measures of admission of foreign investment ("Negative List"). Therefore, in the Draft Catalogue, industries have been grouped into two main categories: (i) encouraged category and (ii) the Negative List.
Structural change of this type is actually a reaction to the recent reform on foreign investment in China (Record-filing Reform). From October 1st, 2016, foreign invested enterprises ("FIEs") that are not subject to special administrative measures of admission shall adopt record-filing administration for its incorporation and changes and no prior approvals from MOFCOM will be required. To implement such reform, NDRC and MOFCOM jointly issued Announcement No. 22 of 2016 ("Announcement No. 22") specifying that the scope of special administrative measures of admission should refer to the restricted category, prohibited category and industries in the encouraged category with equity requirements or senior manager requirements as set forth in the Catalogue for the Guidance of Foreign Investment Industries (Revised in 2015) ("2015 Catalogue").
To conform to the mode as set out in the Announcement No. 22, the Draft Catalogue has combined those restrictive measures for admission of foreign investment into the Negative List. As a result, foreign investors can directly refer to the Negative List section to see if the envisaged investment is subject to prior approval of MOFCOM. Obviously, such reorganization will provide more convenience and easier reference to foreign investors.
Due to this structural change in the Draft Catalogue, industries listed in the encouraged category with equity requirements or senior manager requirements will appear in both the encouraged category sector and the Negative List. According to the Draft Catalogue, for those overlapping industries, investors shall be entitled to preferential policies as well as abide by relevant rules of admission.
However, we would like to draw your attention to the fact that the negative list applicable in the Free Trade Zones ("FTZs") is still valid and it is slightly different from the Negative List as defined in the Draft Catalogue. Therefore, when handling incorporation and changes of FIEs in the FTZs, the negative list of FTZs shall be applied.
2. Less restriction on foreign investment
As compared to the 2015 Catalogue, the Draft Catalogue has reduced the total number of restrictive measures from 93 to 62. For example, restrictions of entry on the following industries have been removed:
Service Industries
- High way passenger transport service;
- Credit investigation and grading service;
- Tally for foreign vessels
Mining Industries
- Exploring and mining of precious metals (gold, silver, platinum families);
- Exploring and cradling of lithium
Manufacturing Industries
- Processing of edible oil and fat, with shareholding restriction also removed;
- Processing of rice, flour and raw sugar and deep processing of corn;
- Manufacturing of biology liquid fuel;
- Manufacturing of motorcycles with shareholding restriction also removedï¼›
- Manufacturing of new energy vehicle battery
Subject to the Draft Catalogue, the above mentioned industries shall be included in the permitted category. As a result, in these industries, establishment and changes of FIEs are no longer subject to MOFCOM approval.
3. Removal of restrictions apply to both foreign and domestic investment
As addressed in the Draft Catalogue, the Negative List specifically regulates the admission of foreign investment in China. In this regard, 11 restrictions have been removed from the Draft Catalogue due to the consideration that domestic investments are also subject to the said restrictions. The removed items include, for instance, construction and operation of large-scale theme park that was originally listed under the restricted category, construction of golf course and villa, gambling, and lottery that were originally listed in the prohibited category.
4. Other issues
It is worth noting that one of the illustrations in the Negative List states that merger and acquisition of affiliated non-foreign invested Chinese enterprises (Domestic Enterprises) by overseas enterprises that are established or controlled by Domestic Enterprise shall remain governed by existing laws and regulations. However, according to Announcement No. 22, all foreign investments in relation to merger and acquisition of Domestic Enterprises shall continuously be subjected to existing requirements and require approval from MOFCOM. It seems the Draft Catalogue intends to narrow down the scope of MOFCOM’s approval on merger and acquisition of Domestic Enterprises by foreign investors. We hope that relevant authorities will further clarify and illustrate such intentions in future.
Issuance of the Draft Catalogue is line with the Record-filing Reform. Although the structural change introduced by the Draft Catalogue is more like a form change than a substantial revision, it does provide easier reference to foreign investors. In addition, with the lifting of restrictions on certain industries, foreign investors can expect to enjoy new market entry opportunities in the near future. As per previous practice, it is expected that the final version of the Draft Catalogue might be released around July, 2017. In that case, for the moment, foreign investors can refer to the Draft Catalogue to assess the potential impact on their proposed investment in China. And Garrigues will keep a close watch on the final version of the Draft Catalogue and keep you posted.
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