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China Foreign Direct Investment
China Foreign Direct Investment

In contrast to Chinese firms' usual strategy of beating foreign competitors on price, the government is rolling out policies to encourage firms to participate in overseas infrastructure development projects to move the country's exports up the value chain.

Chinese leaders have promoted the country's railway technologies in foreign countries, such as Angola where the China-made 1,344-km railroad project was put into operation. China will also encourage its companies to win more global market share in electric power, communications, engineering machinery, automobiles, aircraft and electronics.

Chinese authorities are considering revising the country's guidance catalogue for foreign investment, cutting the number of restrictive measures to 62 from the previous 93.

The country's top economic planner, the National Development and Reform Commission, on Wednesday published a revision draft on its website to seek public opinion on the changes.The easing rules on foreign investment came amid government efforts to push use of the negative list approach, which identifies sectors and businesses that are off-limits or restricted for investment.

The negative list approach is a common practice adopted in many countries to manage foreign investment. China first piloted the rules in the Shanghai Free Trade Zone in 2013.  Earlier official data showed foreign direct investment to the Chinese mainland rose 4.2 percent year on year in the first ten months of the year.

On 7 December 2016, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly released the latest revised draft of the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录(修订稿)) (Draft Catalogue) soliciting public comments. The deadline to submit comments is 6 January 2017.

Background

Since the Foreign Investment Industrial Guidance Catalogue (Catalogue) was first issued in 1995, it has been one of the most fundamental legal documents regulating foreign investment in China. On 1 October 2016, a nation-wide reform on foreign investment was launched resulting in the removal of the requirement to obtain approval from MOFCOM or its local branches for projects which do not fall within a negative list. However, no separate negative list has been issued by the government so far, instead, reference was made to the current catalogue adopted in 2015 (2015 Catalogue). To correspond to this negative list approach, NDRC and MOFCOM changed the structure of the 2015 Catalogue to form the Draft Catalogue. In addition, changes were made to relax certain restrictions on a number of industry sectors.

Highlights

Structural Changes to the Catalogue

One of the main changes in the Draft Catalogue relates to its structure. Under the 2015 Catalogue and all previous versions of the Catalogue, industries were classified under the following categories: (a) encouraged, (b) restricted and (c) prohibited, with those industries which are not expressly listed in the Catalogue falling under the "permitted" category. To implement the recent reform on foreign investment, the Draft Catalogue groups industries under the following two main headings: (a) encouraged and (b) negative list. The negative list section is further divided into three categories:

Industries under the encouraged category but subject to restrictions on foreign equity holding;

Industries under the restricted category; and

Industries under the prohibited category.

As its name suggested, if a foreign investor would like to know whether its investment falls within the negative list (and if so, requires MOFCOM approval), it should refer to this negative list section. Compared with the 2015 Catalogue, where references to these items are scattered throughout, such amendment provides easier reference and clearer guidance to foreign investors.

Encouraged Category

Restrictions on foreign equity holding have been removed for a number of industries (i.e., 100% foreign ownership is allowed), such as: 

o manufacturing and R&D of automobile electronic bus network technologies (汽车电子总线网络技术) and electronic controllers for electric power steering systems (电动助力转向系统电子控制器);

o manufacturing of new energy automobiles power batteries (新能源汽车能量型动力电池制造) – this has been changed from an encouraged industry to a permitted one; and

o manufacturing of track transportation equipment (轨道交通运输设备) – this has been changed from an encouraged industry to a permitted one.

Due to structural changes to the Draft Catalogue, the encouraged industries with restrictions on foreign equity holding also appear under the new negative list section. The Draft Catalogue clarifies that while these industries are subject to the applicable foreign equity restrictions, they will continue to enjoy preferential policies available to any encouraged industry (such as tax reduction on imported equipment).

Restricted Category

A number of industries, including those listed below, have been removed from the restricted category and have now become permitted industries: 

o highway passenger transportation service (公路旅客运输);

o credit investigation and evaluation service (资信调查与评级);

o exploration and exploitation of precious metals (贵金属勘探、开采);

o processing of rice, flour and crude sugar (大米、面粉、原糖加工); processing of edible oil and fats (食用油脂加工) – restriction on foreign equity holding has also been removed;

o production of biological liquid fuels (生物液体燃料生产) – restriction on foreign equity holding has also been removed; and

o motorcycles manufacturing (摩托车制造) – restriction on foreign equity holding has also been removed.

Compared with the 2015 Catalogue, there are around 11 fewer industries under the restricted category in the Draft Catalogue. However, some of these industries have been removed from the Draft Catalogue because they are restricted to both foreign investment and Chinese investment and have already been covered by the Draft Pilot Market Access Negative List (市场准入负面清单草案(试点版))circulated in March 2016, which applies to any investment in China (whether foreign or not). These sectors include, for example, construction and operation of large-scale theme park (大型主题公园建设、经营).

Prohibited Category

Similarly, a number of prohibited industries have been removed from the Draft Catalogue because they are prohibited to both foreign and Chinese investment, such as construction of golf course and villa (高尔夫球场、别墅的建设), gambling and lottery (博彩业).

Other Highlights

The Draft Catalogue clarifies that foreign investors are not allowed to set up a foreign-invested partnership in any restricted industry where restrictions on foreign equity ratio exist.

The Draft Catalogue reiterates that the current regulatory regime on acquisition of associated Chinese companies in the form of round-trip investment remains effective and must be complied with. This seems to suggest that MOFCOM approval under Rules on Foreign Investors Acquiring Domestic Companies 关于外国投资者并购境内企业的规定 is required for such round-trip acquisition regardless of industry sectors.

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