China Tweaks Foreign Investment Rules

Recent declines in foreign direct investment into China have prompted the PRC Ministry of Commerce (MOFCOM) and other PRC agencies to announce new efforts that encourage private investment, especially in small and medium-sized enterprises (SMEs), and loosen some foreign-investment restrictions.

PRC Minister of Commerce Chen Deming announced several planned changes to China’s foreign-investment policies at the 13th China International Fair for Investment and Trade, which took place September 8-11. According to Chen, China will

• Streamline approval processes and gradually ensure that foreign-invested enterprises (FIEs) receive national treatment;
• Gradually ease ownership thresholds for foreign investment in the services sector (although in the absence of details, it is unclear how important this statement is);
• Accelerate construction of economic and technological development zones to encourage foreign companies to develop the high-tech and services outsourcing industries; and
• Encourage more private investment in new and emerging industries and provide incentives for investment in border areas and central and western China.

Chen also announced China’s plans to allow “eligible” FIEs to list on domestic stock exchanges. According to Caijing, the Shanghai Stock Exchange will use renminbi (RMB) for valuation, offering a new source of local-currency financing for foreign companies that have not been able to issue bonds or secure long-term loans.

Foreign-invested partnerships

The PRC State Council on August 19 approved in principle draft Administrative Measures for Foreign Enterprises and Individuals Establishing Inbound Partnership Enterprises, which detail the implementation of the Foreign Partnership Law that was passed in 2007.

Though as CBR went to press the measures had not yet been published, Reuters reported that the measures allow foreign companies to apply for MOFCOM approval to establish locally registered partnerships. Private equity firms, which currently may provide only advisory services or operate as representative offices, face difficulty raising local RMB funds and stand to benefit from the new regulations. Foreign law firms, which must operate as representative offices under PRC law, will likely also take advantage of the opportunity to form partnerships.

Support for SMEs

Amid growing concern that China’s stimulus efforts have focused too heavily on large state-owned enterprises, the State Council on September 22 released Opinions on Further Promoting Small and Medium-Sized Enterprise (SME) Development. The measures aim to

• Encourage government agencies to purchase SME products and services and allow more flexible implementation of social insurance and pension payments;
• Strengthen financial services and expand financing channels for SMEs, as well as improve the SME credit-guarantee system;
• Expand central funding for SME development to encourage technology innovation, structural adjustment, market exploration, and employment;
• Adopt preferential tax policies for SMEs;
• Encourage coordination and cooperation among SMEs to achieve cluster development;
• Encourage SMEs to participate in home appliance replacement programs and explore international markets with export tax rebates and preferential export credit loans;
• Reform government examination and approval systems to reduce administrative burdens;
• Launch training programs to improve SME corporate management; and
• Establish the State Council Working Group for Promoting SME Development to strengthen SME administration and set up a system to monitor and analyze SME statistics.

Private investment

Some of the goals and provisions outlined in these opinions may overlap with the PRC National Development and Reform Commission’s Opinions on Encouraging and Promoting Private Investment, which were submitted for State Council approval in early August. According to Nanfang Daily and other PRC media, this draft reportedly consists of 20 policies that

• Allow private investment in five previously restricted industries—”basic industry”; infrastructure; financial insurance; culture, education, and healthcare; and public services—with a relatively low market entry requirement, though whether foreign investors would be able to invest as private investors remains unclear;
• Reduce restrictions on the percentage of shares held by private enterprises;
• Speed up the investment approval process by drafting a catalogue of central-government-approved investment projects and allowing some private projects to forego the approval process as long as they file with related government offices;
• Draft rules on personal loans and on opening up the SME bond market; and
• Provide tax breaks for reinvestment and technological development.

[author]This article is adapted from a report that first appeared in China Market Intelligence, the US-China Business Council’s (USCBC) members-only newsletter. To find out more about USCBC member-company benefits, see www.uschina.org/benefits.html.[/author]