Revised Catalogue Brings Few Changes to China’s Foreign Investment Regime

By Kyle Sullivan, Joie Ma, and Caitlin Clark

Foreign companies will not see significant market access openings as a result of China’s draft of the revised Catalogue Guiding Foreign Investment in Industry, updated from the 2007 version and released for comment on April 1, 2011. Despite numerous statements from senior PRC leaders that the revised catalogue would present substantial investment opportunities for foreign companies, the draft retains nearly all the restrictions that have raised concerns among many US companies. Specifically, the draft retains restrictions on investment in many services sectors and imposes new constraints on manufacturing processes in various sectors such as new energy and agriculture. The draft revised catalogue was not yet finalized as CBR went to press, however, and PRC regulators may make further revisions to the final version.

Revised catalogue reflects broad economic, industry goals

The draft revised catalogue aims to support China’s overall economic and industry policy goals, as outlined in the 12th Five-Year Plan (FYP, 2011-15) and other major policy documents (see Background on the Foreign Investment Catalogue). The draft directs more foreign investment toward high-tech and environmental protection sectors—in line with government plans to move industrial capacity up the value chain, create a more energy-efficient industrial base, and foster advanced technology development. In particular, many investments added to the encouraged category appear to fit within China’s strategic emerging industries—seven industries the PRC government expects will drive economic growth over the next decade. For example, the draft adds under the encouraged category resource recycling, pollution treatment, and waste processing technologies—key subsectors in the energy efficiency and environmental conservation industry.

The draft lifts few restrictions on investment in new-energy technologies and equipment—also a strategic emerging industry—despite the strong demand for alternative energy sources and technologies needed to meet stringent energy-reduction targets set in the 12th FYP. Moreover, the draft retains most ownership caps on encouraged, large-scale investment projects in new energy that were introduced in the 2007 catalogue.

The draft also includes higher thresholds and more specific technology requirements for investment projects. In many cases, it has increased project approval thresholds for a broad range of catalogue items to promote large-scale production and industry consolidation. These changes show that the government is becoming more selective in the types and scale of investments it seeks to encourage. For example, the catalogue encourages foreign investment in manufacturing key equipment for new-energy power projects that generate at least 3 MW of electricity, up from the 2007 catalogue’s 1.5 MW threshold.

The draft also introduces other notable changes from the 2007 version.

Agriculture

The draft expands restrictions on foreign investment in processing of edible soybean and rapeseed oil to include cottonseed, peanuts, and tea seed oil.

Auto and transportation equipment

The draft makes some significant changes to auto assembly and research and development (R&D). The draft removes manufacturing of complete autos and establishment of auto R&D institutions from the encouraged category, though ownership caps and other foreign investment limitations may remain in place; adds manufacturing of special equipment used to produce car batteries to the encouraged category; and adds key components of new-energy vehicles to the encouraged category but restricts foreign ownership to 50 percent of projects that develop key components for new-energy vehicles (previously, no restrictions had been in place).

Chemicals

The draft makes several revisions to the encouraged list of chemical and chemical fiber manufacturing industries and adds new technical requirements for encouraged projects.

The draft raises the annual production threshold of encouraged enthylene manufacturing from 800,000 tons to 1 million tons but still limits foreign investment to a Chinese majority-controlled entity; broadens restrictions on manufacturing of paints and dyes that contain harmful materials and use outdated technology; and adds high-performance fluorine resin, fluorine rubber, fluorine-coated materials, fluorinated intermediates for medical use, and environmentally friendly refrigerants and detergents to the encouraged category.

Financial and “modern” services

Despite previous PRC government plans and statements that imply greater opportunities for foreign companies in China’s services sector, financial services industries—such as banking, insurance, and securities—remain in the restricted category, with foreign investment in joint ventures (JVs) limited to a minority share. But the draft removes financial leasing from the restricted category and adds venture capital, a sector unmentioned in previous catalogues, to the encouraged category.

Fossil fuels

The draft narrows the scope of encouraged foreign investment in large-scale coal and chemical product manufacturing to coal-based oil, methanol and dimethyl, and olefins—each with varying annual production thresholds. The draft still limits foreign investment to a minority share.

The 2007 catalogue restricted foreign investment in construction and operation of refineries with annual production levels of less than 8 million tons. The revised draft catalogue breaks down this category into oil refineries with atmospheric and vacuum units, catalytic cracking, continuous restructuring, and hydrocracking—each with varying production thresholds.

Healthcare and pharmaceuticals

The draft makes few significant changes to the pharmaceutical and healthcare product manufacturing industries with the exception of permitting wholly foreign-owned medical facilities to operate on a pilot basis. In addition, the draft removes from the catalogue biomedical material and product manufacturing, which was previously encouraged.

Logistics and transportation

The draft removes restrictions on foreign companies engaged in retail and wholesale auto distribution, but foreign investment in freight and passenger train transportation remains restricted.

Media

The draft still prohibits foreign investment in culture-related websites, e-commerce, news, websites, and web-streaming audio-visual services, but it explicitly excludes music-related content from that prohibition.

New energy

The draft maintains ownership caps on new-energy power-generation equipment—including geothermal, methane gas, nuclear, oceanic, solar, and wind power equipment—and limits foreign participation to equity and cooperative JVs. The draft also adds to the encouraged category manufacturing of bearings for wind turbines that generate 1.5 MW of power or more and gear transmissions manufacturing for wind and nuclear power.

New materials

In line with national goals for developing strategic emerging industries, the draft adds to the encouraged category manufacturing of “extreme materials,” such as multi-functional windshield glass, and manufacturing and R&D of light-weight, eco-friendly new materials for aviation and aerospace. The draft retains ownership caps on rare earth smelting and separation projects, however, and prohibits foreign companies from mining and extracting rare earth materials.

Special equipment manufacturing

The draft revised catalogue adds pollution treatment and detection equipment and other environmental conservation technologies to the encouraged category, seemingly in line with strategic emerging industry development goals.

Finalizing the catalogue

The US-China Business Council has submitted to the PRC government comments on the revised draft catalogue. When the catalogue will be finalized and issued remains unclear.

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Background on the Foreign Investment Catalogue

As the PRC government’s long-standing mechanism for managing foreign investment, the Catalogue Guiding Foreign Investment in Industry directs foreign capital to industries the government has targeted for economic development. The government generally places under the catalogue’s “encouraged” category sectors in which it aims to accelerate manufacturing and technological development. Sectors on the encouraged list generally benefit from favorable policies such as forms of incorporation, social benefits, and tax incentives. Industries in which government officials believe domestic enterprises may face intense foreign competition—or in which there are already well-established state-owned enterprises—are typically categorized as “restricted” and face stricter policies and investment limitations. Industries that involve natural resources, national security, and traditional Chinese medicine are categorized as “prohibited” and are closed to foreign investment. All unlisted investment types are permitted by default. The revised draft catalogue includes 464 investment types, 350 of which are encouraged, 78 restricted, and 38 prohibited.

—Kyle Sullivan and Joie Ma
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Kyle Sullivan is manager, Business Advisory Services, and Joie Ma is manager, Programs, at the US-China Business Council (USCBC) in Shanghai. Caitlin Clark is manager, Business Advisory Services, at USCBC in Washington, DC. This article is adapted from a report that first appeared in China Market Intelligence, USCBC’s members-only newsletter.