China Revised the Guideline Catalogue of Industries for Foreign Investment

On 10 March 2015, the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") jointly issued a new Guideline Catalogue of Industries for Foreign Investment (Amended 2015) ("2015 Catalogue"). The 2015 Catalogue will come into effect on 10 April 2015. It will replace the current Catalogue of 24 December 2011 ("2011 Catalogue").

All foreign investment into China is still subject to approval and registration by the competent Chinese authorities. Foreign investment is divided into the following four categories: encouraged, permitted, restricted and prohibited. The type of category a project belongs to has influence on which level of authorities are in charge of a project and also decides on the feasibility of market access.

For the Chinese Government the Guideline Catalogue is an instrument to exercise macro-economic guidance in accordance with its general industry policies. Since the first issuance in the year 1995, the Chinese government periodically amends the Guideline Catalogue to steer China’s development. The 2015 Catalogue is the sixth amendment.

Some major changes brought by the 2015 Catalogue are as follows:

1. Number of industries in the restricted category are significantly reduced

The most significant changes of the 2015 Catalogue refer to the restricted category. The number of industries in the restricted category have been reduced from 79 to 38.

• In the real estate industry, foreign investors are no longer restricted from investing in development of large-scale land and construction and operation of high-class hotels, high-class office buildings and international exhibition centers. This seems to indicate that the Government no longer considers the real estate sector to be overheated.
• In the manufacturing industry, the manufacture of chemicals (e.g. calcined soda) and certain general apparatus (e.g. various types of P0-grade bearings and their components) have been deleted from the restricted category and moved into the permitted one.
• In the energy sector, the construction and operation of electricity grids has been shifted from the restricted category into the encouraged one.

However, on certain manufacturing industries, the Chinese Government is taking a more cautious attitude:

• The manufacture of complete automobiles belonged to the permitted category in the 2011 Catalogue. In the 2015 Catalogue it has now been shifted into the restricted category. Such adjustment reflects the Government’s intention to support Chinese domestic automobile manufacturers.
• As to hospitals, despite of a circular issued in 2014 according to which wholly foreign owned hospitals are allowed to be established in seven pilot areas including the Shanghai Free Trade Zone (“Shanghai FTZ”), the 2015 Catalogue shifted hospitals from the permitted category into the restricted one and imposed restrictions on the investment form. I.e. Foreign-invested hospital must take the form of Sino-foreign equity joint venture (“EJV”) or Sino-foreign cooperative joint venture (“CJV”).
  

2. Limitations on shareholding ratios of foreign investors are further relaxed

Compared with the 2011 Catalogue, the number of industries which allow foreign investment only in the form of joint ventures has been reduced from 43 to 15. The industries which require “Chinese as majority shareholders” have been reduced from 44 to 35. Some examples are:

• For value-added telecommunication projects, the shareholding ratio restrictions imposed on foreign investors for e-commerce business, i.e. no more than 50%, are abolished. Such change mirrors the new practice implemented in the Shanghai FTZ since January 2015. As a result, foreign investors are allowed to set up a wholly foreign-owned e-commerce company in China
• For accounting and auditing services, the requirement to establish a joint venture are abolished in the 2015 Catalogue. However, it is still required that the managing partner of the accounting/auditing firm shall be a Chinese national.

The 2015 Catalogue shows the Chinese government’s continuous efforts on further opening up to foreign investment. However, unlike past amendments, this time few items were newly added into the encouraged category. The changes mainly focus on relaxing restrictions in such industries which do not impact national economic security or social public interests and in which the Government welcomes reform through regulation by market forces.

Please note that as informed in our newsletter of March 2015, China has published the draft of the PRC Foreign Investment Law (“FIL”). The FIL provides for a Negative List approach. Once the FIL is enacted, it will change the entire regulatory framework for foreign investment and the Negative List will replace the Guideline Catalogue.