Introduction
On 10 March 2015, the Ministry of Commerce (“MOFCOM”) and National Development and Reform Committee (“NDRC”) of China, released the Catalogue for the Guidance of Foreign Investment (the “2015 Catalogue”) which became effective as of 10 April 2015.
The Foreign Investment Catalogue reflects the government’s prevailing economic and political policies. Foreign investors should always check it before to start a business or invest in China to figure out how their business or investment will be treated by the China government and local authorities, since in the Catalogue there is the planning of economic and industrial development for the future.
The Catalogue divides investments into three main categories, being "encouraged" industries, for which the Chinese government is actively seeking foreign investments and for which investors are allowed to enjoy certain benefits such as tax incentive, cheaper land cost, simplified approval procedures or other favorable investment terms; "restricted" industries, for which the Chinese government intends to impose restrictions such as foreign shareholding ratio’s, limits on the operation of the company and special approvals; "prohibited" industries, in which no foreign investment is allowed. Any industry sectors that are not listed in the Foreign Investment Catalogue are deemed to be “permitted”.
The Catalogue also contains rules on foreign ownership restrictions and corporate forms through which an investment must in certain cases be made (typically, an obligation to form an equity or cooperative joint venture).
Overview of the 2015 Catalogue
The 2015 Catalogue lists 349 “encouraged”, 38 “restricted” and 36 “prohibited” industries. As compared to the 2011 Catalogue, the “restricted” industry sectors have been significantly reduced from 79 to 38, and the “prohibited” sectors have also been slightly reduced from 38 to 36. The overall trend is therefore clearly towards greater openness and liberalization.
Encouraged industries category
Under the 2015 Investment Catalogue, the encouraged category has been expanded. Compared to the 2011 Catalogue, the notable amendments are as follows:
Construction and operation of grids (this still requires a majority shareholding by the Chinese partner): this is newly added into the encouraged category
accounting and auditing: the restrictions are changed from “limited to cooperation or partnership” to “the chief partner must hold the Chinese nationality”
Construction and operation of urban subway, light railway and other track transport: the restriction of “ Chinese partner with majority shareholding” was removed
Senior care institutions: this was newly added into the encouraged category, following a circular issued by MOFCOM and the Ministry of Civil Affairs to encourage foreign investments in for-profit aged care institutions, which reflects the urgent need for senior care facilities in China given the now rapid decline of its workforce
The establishment of research and development centers for new and advanced technology and incubators are still within the encouraged category. This is in line with the technology oriented policies currently implemented by the Chinese government in an attempt to further close the gap with the developed world and to avoid the middle-income country trap.
Restricted industries category
The restricted category has seen most of the liberalization in the 2015 Catalogue. Most of the liberalized industries lie in the manufacturing sector, while some others in sectors such as service, agriculture and infrastructure. For most of these industries, the 2015 Catalogue marks the permission of foreign investment with no special restrictions. Compared to the 2011 Catalogue, some particular changes in the restricted category under the 2015 Catalogue are summarized as follows:
The industries of chemicals manufacturing (such as calcined soda) and general apparatus manufacturing (such as various types of po-grade bearings and their components) were removed from the restricted category, which means they are now permitted for foreign investment with no special restrictions
Other manufacturing industries were also removed from the restricted category, such as medicine manufacturing, but excluding arms and ammunition manufacturing (which remains “prohibited”)
The manufacturing of whole units of automobile, special automobiles and motorcycles (Chinese shareholding not less than 50%, and the same foreign investor can establish less than (including) two joint ventures to produce the same type of whole units of automobile, the aforementioned restrictions on two joint ventures do not apply in case of merger of other domestic automobile manufacturing enterprises with Chinese joint ventures) were newly added into the restricted category
E-commerce for technology, media and telecommunications business (TMT) were removed from the restricted category, but other value-added and basic TMT businesses remain in the restricted category and subject to 50 percent or more Chinese shareholding requirement
Development of tracts of land, construction and operation of high-class hotels, high-class office buildings and international exhibition centers, investment in real estate secondary market and real estate brokerage were removed from the restricted category
In the 2011 Catalogue, banks, non-bank financial institutions, trust companies, and currency brokerage companies were listed in the restricted category. In the 2015 Catalogue, only banks still remain in the “restricted” category and subject to restrictions such as, the shareholding in one single Chinese commercial bank by a single foreign financial institution or any affiliate controlled or jointly controlled by it (either acting as a promotor or strategy investor), shall not exceed 20% (etc.).
Prohibited industries category
Although the total number of prohibited industries has been reduced in the 2015 Catalogue, new prohibited industries have nevertheless been added into the list, including the following:
The wholesale and retail of tobacco (this was considered a restricted industry in the 2011 Catalogue)
The consultancy on Chinese legal issues (except for providing information about the impact of Chinese legal environment) – accordingly, the market for foreign law firms is still very much closed in China, and this notwithstanding the proliferation of non-Chinese firms in the PRC and recent initiatives in the Shanghai FTZ to allow for joint ventures between Chinese and foreign firms
Online publishing services
Construction of golf courses and villas (but note that the operation of golf courses and villas is not prohibited, and shall be deemed as permitted).
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