Final 2011 Catalogue Offers Few New Openings for Foreign Investment

Francesca Baruffi

China has finalized long-awaited revisions to a key foreign direct investment policy document that offers few reductions in foreign ownership restrictions or services sector openings. The 2011 Catalogue Guiding Foreign Investment in Industry was jointly released on December 29, 2011 by the PRC National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM). The document provides a sense of the central government’s priorities for foreign investment in China and is a revision to an earlier draft Catalogue Guiding Foreign Investment in Industry, which was released for comment in April 2011. The new catalogue is set to go into effect January 30.

Final catalogue sets investment tone
The Catalogue Guiding Foreign Investment is released approximately every five years and is divided into three categories of foreign investment: encouraged, restricted, and prohibited. These sections are revised each time the catalogue is reissued to reflect the PRC government’s priorities for foreign investment across various industries. The catalogue is designed to support China’s economic and commercial plans, most notably the goals and policies outlined in the 12th Five-Year Plan (2011-15). The revisions made to the April 2011 draft, and subsequently included in the final catalogue, reflect these industrial and economic goals by placing China’s strategic emerging industries--such as information technology, biotechnology, and new energy--in the encouraged category.
In addition to minor positive changes made in the April 2011 draft, the final version of the catalogue reflects only a small number of changes that US-China Business Council (USCBC) and other organizations suggested in comments on the April 2011 draft catalogue. USCBC identified nearly 100 ownership restrictions in the draft catalogue, including both requirements to partner with a Chinese entity and, in many cases, limiting the foreign equity holder to a minority share. Most of these ownership restrictions were retained in the final version.

Changes to the 2011 catalogue

The final version of the catalogue adds the production of certain agricultural materials to the restricted list, while keeping many agricultural products on the restricted and prohibited lists. The catalogue adds the production of white rice, flour of certain seed oils, and other flower oils on the restricted and prohibited lists.

The final catalogue adds to the encouraged list a few chemicals that USCBC requested in its comments, marking a slight improvement from the April 2011 draft. The final catalogue adds nylon-6 and nylon-99 to the encouraged section. Other chemical components that USCBC had requested to be moved to the encouraged section, however, have been retained in the restricted or prohibited sections.

Financial services
Financial services--including banking, insurance, and securities--remains a tightly restricted sector for foreign investors, and the new catalogue shows no movement on this front. Despite the PRC government’s recent efforts to increase the proportion of services to industry in GDP, ownership restrictions on credit services remain unchanged. The catalogue added “household services” to the list of encouraged financial services, but did not definte the scope of this item.

General equipment manufacturing
Across manufacturing industries, the catalogue specifies limitations in investment in general equipment, including the manufacture of construction parts and manufacturing machinery. A few positive changes were made in this section. The 2007 catalogue included restrictions on investment in production of wheeled cranes weighing less than 500 tons and crawler cranes weighing less than 600 tons. In the current catalogue, the two crane categories have been condensed into one, and the weight thresholds have been dropped to 400 tons--effectively lowering investment restrictions on more heavyweight cranes.

Power, gas and water production and supply
The construction and management of gas, heat supply and water drainage networks in cities by foreign companies has been further restricted. Foreign investment is now restricted to cities where the population is more than 500,000. The previous catalogue had restricted foreign production and management of these resources in cities with a population of more than 1 million, and this change further limits foreign investment by lowering the permitted population threshold. The Chinese side of a joint venture still must hold a controlling interest.

Retail services
USCBC’s comments requested that the retailing of certain goods be removed from the restricted section, including some medicines and agricultural products that have been listed as restricted. The PRC government responded with minor changes, but kept most products on the restricted list and added some products to the list. The government removed “grain storage” and “medicine” from the restricted list, while leaving “grain procurement” in the restricted category. USCBC originally requested that the government remove both “grain procurement” and “grain storage.” The government also added the establishment and management of large-scale wholesale agricultural goods markets by foreign enterprises to the restricted section.

Special-purpose equipment manufacturing
As with general equipment manufacturing, the PRC government relaxed restrictions on special-purpose equipment manufacturing, allowing greater flexibility and market access for foreign companies. The catalogue divides off-highway dumpers into two categories: automatic and hydraulic. Foreign investment in automatic dumpers weighing under 135 tons is permitted, while investment in hydraulic dumpers is allowed only in dumpers weighing 60 tons or less. Both types of dumpers remain in the restricted category.

Telecommunications and electronics
Although USCBC requested that value-added telecom services be added to the encouraged category and that ownership restrictions be relaxed, this sector remains in the restricted category and still requires that the Chinese side hold a controlling interest. The new catalogue encourages foreign companies to invest in developing standards in telecom and electronics, such that the manufacture of equipment for wireless LAN and WAN networks is “especially encouraged to follow WAPI standards (Chinese National Standards for Wireless LANs).”

Transportation vehicle and equipment manufacturing
A few positive changes were made in the final version of the catalogue, notably on ownership restrictions. The final catalogue removes the 50 percent limit on foreign capital in key components of new-energy vehicles on all components except batteries.

The retention of many of the previous investment restrictions is disappointing, but not a surprise. Given China’s desire to increase investment in the United States and other markets, however, the new catalogue represents a missed opportunity to reduce investment barriers at a time when investment issues are gaining more attention in the bilateral relationship. The impact of continued restrictions on US investors in China may be felt more acutely in the US-China relationship as the Chinese government seeks greater investment access in the United States.