China Enacts New Catalogue of Industries for Encouraged Foreign Investment

The PRC Government authorities regularly issue a Catalogue of Industries for Encouraged Foreign Investment in order to attract foreign investment in certain industries. Foreign investments in encouraged industries may enjoy certain benefits, such as import duty exemptions for import of equipment for self-use within certain thresholds.

On October 26, 2022, the PRC National Development and Reform Commission (“NDRC”) and the PRC Ministry of Commerce (“MOFCOM”) jointly issued the new Catalogue of Industries for Encouraged Foreign Investment, 2022 Version ("Catalogue 2022"). The Catalogue 2022 will enter into effect on January 1, 2023. Simultaneously with the entering into effect of the new Catalogue 2022, the Catalogue of Industries for Encouraged Foreign Investment, 2020 Version (“Catalogue 2020”) will cease to be effective.

Compared to the Catalogue 2020, the new Catalogue 2022 has further expanded the industry sectors in which foreign investment is encouraged, i.e. 239 items are newly added, and 167 items are revised. There are in total 1474 items in the Catalogue 2022, of which 519 items are encouraged nationwide ("national part") and 955 items are encouraged in the provinces and autonomous regions in the Western, Central and North-Eastern regions of China ("regional part").

Below is an overview on the main changes in the Catalogue 2022 compared to the Catalogue 2020.

1. Further encouraging foreign investments in the advanced manufacturing sector

The Catalogue 2022 (national part) continues to focus on manufacturing as a key direction for encouraging foreign investments. According to the official comments of MOFCOM (Chinese text available under: www.gov.cn/zhengce/2022-10/29/content_5722482.htm), the following main items for example have been newly added or revised in the encouraged category in order for China to improve the level of the industrial chain and supply chain, and to accelerate the upgrading of technologies through constant improvement, adjustment and optimization:

• R&D, manufacturing and application of new technology and new products for forestry biomass;
• R&D and manufacturing of consumables related to pharmaceutical manufacturing;
• Manufacturing of high-tech non-ferrous metal materials and relevant products;
• R&D and manufacturing of high-performance photoresists;
• R&D and manufacturing of glow discharge mass spectrometers

Most of the new and revised items in the Catalogue 2022 reflect the intention of the Chinese government to further focus on and develop the relevant manufacturing industries in the areas of IT, advanced machinery, energy conservation, environmental protection, modern transportation, etc. We assume that such items are also a response of the Chinese government to some major international policy issues such as the Sino-U.S. trade tensions in the IT sector, the global energy crisis, global climate change, rapid development of new energy vehicles, etc. Such items in the Catalogue 2022 (national part) are, for instance and without limitation:

- IT industry:

• new generation of information technology industry,
• development of key equipment for manufacture of very-large-scale integrated circuits (VLSI),
• manufacture and regeneration of wafters

- Advanced machinery:

• biomedicine and high-performance medical equipment,
• marine engineering equipment,
• high-end computer-numerical-controlled machine tools and robots

- Energy conversation and environmental protection:

• electric power equipment,
• energy conservation and environmental protection field with high-performance light metal and copper alloy materials deep processing,
• industrial water-saving technology, technology development and application and related equipment manufacturing,
• development and manufacture of energy-saving comprehensive facilities or solutions for charging/energy storage integration,
• R&D, manufacturing, construction and operation of new energy storage equipment

- Modern transportation:

• manufacture of hardware and key components related to autonomous driving,
• advanced rail transit equipment,
• high-tech ships,
• energy-saving and new energy vehicles

Thus, the above and related industrial sectors will become more interesting and attractive for foreign investors to invest in.

2. Further encouraging foreign investments in the modern service sector

The Catalogue 2022 (national part) continues to guide foreign investments into modern service industry. In this regard, the MOFCOM has enumerated the following items that have been newly added or revised in the encouraged category:

• advanced system integration technology and services for low carbon, green energy and water conservation;
• professional design services;
• vocational colleges;
• human resource services;
• assessment, certification and examination of clean production

Also for the service industry, the intention of the Chinese government to, in particular, enhance environmental protection can be seen in the following new or revised items, for instance and without limitation:

- Environmental protection:

• clean operation, engineering construction and technical services of traditional energy,
• evaluation, certification and audit for clean production,
• advanced system integration technologies and services of low-carbon, environmental protection, green, energy conversation, water conversation

There are additional new and revised items showing the expectation of the Chinese government to gradually recover and enhance domestic outdoor activities during the still on-going COVID-19 pandemic:

- Domestic outdoor activities:

• tourism, conferences and exhibitions,
• construction, operation and management of fitness venues and facilities such as outdoor sport camps,
• R&D, popularization and promotion of smart sports products and services

Consequently the above-mentioned service sectors also provide new opportunities for foreign investors.

3. Further encouraging foreign investment in the Western, Central and North-Eastern regions of China

In order to support industries in the Western, Central and North-Eastern regions of China according to their natural resources and industrial strengths, various new items have been added or modified for the respective regions under the Catalogue 2022 (regional part). MOFCOM mentioned the following examples referring to specific regions in its official comments:

- Shanxi Province, Liaoning Province, Anhui Province, Ningxia Hui Autonomous Region

• manufacturing of smartphones, tablet PCs and other intelligent terminal products and key components,
• manufacturing of clothing accessories,
• R&D and manufacturing of functional and environmentally friendly recycled polyester filaments,
• manufacturing of liquid crystal display materials and organic electroluminescent display materials

- Inner Mongolia Autonomous Region, Jiangxi Province, Guizhou Province, Heilongjiang Province:

• R&D and application of clean coal technology products,
• primary or deep processing of garden flowers,
• cultivation of selenium-rich agriculture products,
• R&D and innovation of use and protection technologies for black soil land

- Tibet Autonomous Region, Xinjiang Autonomous Region, Yunnan Province, Qinghai Province:

• commercial franchises,
• desert economic industry,
• cross-border logistics,
• development and operation of ecological tourism

Industry wise, the new and revised items in the regional part of the Catalogue 2022 provide foreign investors with more diversity to consider new or increased investments according to the respective regional strengths and characteristics of the relevant region. For instance:

- Automotive industry (e.g. Jilin Province):

• manufacture of automotive parts and components,
• manufacture of special-purpose motor vehicles,
• automotive financing services

- Energy industry (e.g. Shanxi Province):

• design and manufacture of containerized energy storage tanks for photovoltaic solar power plants,
• development, production and utilization of geothermal energy

- Agricultural, garden flowers industry (e.g. Henan Province, Jiangxi Province):

• cultivation of advantageous and characteristic agricultural products and dual-use crops for medicine and food,
• primary or deep processing of garden flowers,
• development, R&D, processing and export of characteristic industries of agriculture, forestry, animal husbandry and fishery

- Tourism (e.g. Northeast China, Hainan Province):

• development of winter tourism resources (ice and snow sports), construction and operation of related facilities such as ski resorts and hotels,
• development of hot spring resources, construction and operation of hot spring resorts,
• offshore new-type international trading (of advanced technical services),
• international water transport of passengers and cargos and auxiliary business

Further for most of the regions, items in relation to environmental protection and energy conservation have been newly added or modified, for instance:

• fuel cell systems and components,
• R&D, production and application of energy storage technologies,
• R&D and production of new materials for energy conversion in the field of new energy,
• energy saving, water saving, environmental protection equipment manufacturing and its solution application

Accordingly, when considering new or additional investments, foreign investors may also consider looking at the Western, Central and North-Eastern regions of China. The respective regional traditional industries may be more eager to receive fresh investments or new technologies. And any existing infrastructure, natural resources and relatively lower labor costs may be helpful to better manage investment costs.

Benefits for foreign investments in encouraged sectors

According to the official comments of MOFCOM, foreign investments in the encouraged category can mainly enjoy the following benefits:

• For encouraged foreign-invested projects, self-used equipment purchased and imported within the total amount of investment can be exempted from import duties, unless otherwise provided in the Catalogue of Key Technical Equipment and Products Not Exempted from Import Duties (released by various PRC authorities on December 10, 2021) and the Catalogue of Imported Merchandises under Foreign-Invested Projects Not Exempted from Import Duties (released by the PRC General Administration of Customs on April 4, 2022);
• For encouraged foreign-invested industrial projects with economical and intensive land use, land shall be supplied with priority, and the land transfer reserve price for the granted land use rights can be determined at no less than 70% of the national minimum price standard for transfer of industrial land in the corresponding location;
• For foreign investments in the western regions of China and Hainan Province, the corporate income tax rate can be reduced to 15%.

"Western regions of China" include, according to the relevant explanation of the NDRC, Chongqing Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Tibet Autonomous Region, Shannxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region, Xinjiang Autonomous Region, Inner Mongolia Autonomous Region and Guangxi Province.

Apart from the above benefits that apply nationwide, some local governments have in the meanwhile already released additional preferential measures to further attract foreign investments in response to the Opnions of the PRC State Council on Further Improving the Use of Foreign Investments ("Opinions", released by the State Council on October 30, 2019). For instance, the Guangdong Province People's Government issued a Circular on Several Measures to Further Stabilize Foreign Investments on July 21, 2020. According to such Circular, new foreign-invested projects with an actual annual foreign capital amount (excluding loans from foreign shareholders) exceeding USD 50,000,000 and capital increase projects exceeding USD 30,000,000 will receive a subsidy at a rate of not less than 2%, with a maximum amount of RMB 100,000,000. Also the Shanghai Municipality People's Government has released guiding policies for encouraged foreign-investment projects providing for financial subsidies for such encouraged foreign-investment projects as well as for social investment promotion agencies, talent recruitment, etc.

Summary

The Catalogue 2022 in its entirety shows an enhanced focus on manufacturing and service industry relating to environmental protection and energy conservation. This reflects the Guiding Opinions of the State Council on Accelerating the Establishment and Improvement of the Green and Low-carbon Circular Development Economic Systems (promulgated by the PRC State Council on February 2, 2021). According to these Opinions, the development of China shall be made on the basis of efficient utilization of resources, strict protection of ecological environment and effective control of greenhouse gas emission so as to reach an economic system of green and low-carbon and circular development. The major goals will be, until 2025, to optimize the industrial structure, energy structure and transport structure, to significantly increase the proportion of green industries, etc. Therefore, it can be expected that with the effectiveness of the Catalogue 2022 in 2023 and in the following years, more implementing policies, rules and regulations will be released to facilitate the relevant encouraging policy for foreign investment in the areas of environmental protection and energy conservation, as well as in other encouraged sectors.

Despite the above, discretion is still advised for foreign investors' decision-making on investments in any encouraged sectors, in particular, if a relevant decision is made in reliance of receiving any benefits or incentives. Foreign investors should not only get familiar with the then applicable Catalogues, Negative Lists and regulations, but also seek legal advice and consult in-charge governmental departments to ensure the practical implementation of the law. For significant investment projects, an investment agreement clearly stating the subsidies offered should be signed with the competent authority before any substantial investment is made.