A friend of mine, an Italian professional, who is reading these entries sent me a message last night telling me that one of his client was not aware of the existence of this “categorization” of the investments in China. This is why today my intent is trying to give a brief introduction about the so called “Catalog for the Guidance of Foreign Investment”. In fact, when a foreign investor is planning a move into China, first he/she must be sure the industry considered is open or not to foreign investors.
Foreign investments from 1995 have been regulated or “directed” by the so called:
Catalog for the Guidance of Foreign Investment
(
http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=142915
).
The Catalog was first published in 1995 and had since been updated from time to tie to reflect China’s changing focus on enhancing the quality of foreign investments. Indeed, it is a very precise policy of the Chinese government that foreign investments must be implemented in a manner that is consistent with Chinese policy and in a way that will promote China’s development. Those who are familiar with the Catalog will understand its importance, in fact it lists a number of industries and it classifies them according to whether foreign investment is: i) encouraged, ii) restricted, or iii) prohibited. To be clear, the encouraged category shows where the Chinese government wants foreign investments to be directed, the restricted and prohibited categories show sectors that are hold off in China for foreign investors. According to the Provisions Guiding Foreign Investment Direction, industries not listed in any of the three categories will be deemed to be “Permitted.”
On December 24, 2011, China’s National Development and Reform Commission (NDRC) and the Ministry of Commerce of China jointly issued the revised “Catalog” effective from January 30, 2012 to replace its previous version issued in 2007 (the old version of the Catalog is available at:
http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=87372
for a comparison). The 2011 Catalog is the fifth revision of the document since its first promulgation. In particular foreign investors are encouraged under the 2011 Catalog to invest in projects that call for energy-saving and environmental protection, or engage in new-generation Information Technology, high-end equipment manufacturing, new-energy, new materials and new-energy automobiles.
An NPRC official explained the key points and major changes in the 2011 Catalog in a published question-and-answer session with reporters. The changes he noted may be summarized as follows:
- reducing the Restricted and Prohibited categories in line with commitments to the World Trade Organization and the state’s open market economic policy. Eleven caps of foreign equity ownership proportion have been removed;
- upgrading manufacturing through vigorously promoting high-end manufacturing industries, curbing sectors that are overcapacity, and improving traditional industries. Accordingly, the 2011 Catalog encourages investment in innovative technology and advanced materials and equipment in the areas of textiles, the chemical industry, and machinery, while downgrading the production of complete automobiles, polycrystalline silicon, and large-scale coal chemical products to the “Permitted” category by removing them from the “Encouraged” list;
-
fostering strategic emerging industries by largely incorporating them into the “Encouraged” list of industries, particularly those related to energy conservation, environmental protection, the new generation of information technology (e.g., the next-generation Internet system based on IPv6), biotechnology, high-end equipment manufacture, new energy resources, and clean-energy automobiles. Encouraging investment in these areas follows the
Decision of the State Council on Accelerating the Fostering and Development of Strategic Emerging Industries
(Guo Fa [2010] No. 32 [in Chinese] (Oct. 18, 2010), CPG website); and -
developing service industries by adding to the “Encouraged” list the categories of venture capital companies and services related to vehicle charging stations, intellectual property rights, offshore oil pollution cleanup, and vocational skills training, coupled with five other industries. Financial leasing companies and medical institutions had been removed from the “Restricted” list in the 2007 Catalog and thus are classified in “Permitted” list. (
Optimize Utilization of Foreign Investment Structure, Promote the Transformation of Economic Development Patterns – An NDRC Responsible Person in Charge Answers Reporters Questions on the Catalog of Industries for Guiding Foreign Investment (2011 Revision)
[in Chinese] (Dec. 31, 2011), NDRC website.)
The new Catalog generally applies to projects that are approved after it came into force. Projects in the “Encouraged” and “Permitted” categories with a total investment of less than US$300 million are generally subject to the approval of local competent authorities, unless otherwise stipulated. (
Id
.) Projects on the “Encouraged” list are always supported by a number of preferential benefits, including tax incentives. For example, foreign investors engaging in encouraged projects in Western China may enjoy a reduced corporate income tax rate of as low as 15%. (
Id.
)
As stated by the NDRC, the new Catalog is intended to reflect the continued openness, to promote strategic new industry. The Catalog seems to stress the trend towards opening up of the local economy, consistent with China’s WTO commitments, and it shows the intention of the Chinese government to transform China into an advanced technology country. It is also evident that China will continue to implement the opening-up policy and improve its economic and political system to attract new investments (FDI will benefit from this policy).
– Cristiano Rizzi