NDRC Role in Foreign Investment Approvals Pared Back

January 22, 2014

Owen Haacke and Ryan Ong

The National Development and Reform Commission (NDRC) issued new guidelines in December that trim its role in foreign investment approvals, but not in sectors that currently have foreign investment ownership restrictions. The changes will apply to both centrally and locally approved foreign investment projects, and largely eliminate the government approval of feasibility studies for investments not subject to conditions outlined in policies such as the Catalogue Guiding Foreign Investment (CFGI). The Ministry of Commerce and local commerce commission approval of investment documents is unaffected by the NDRC announcement.

On the eve of US-China commercial negotiations in mid-December, the National Development and Reform Commission (NDRC) released a pair of investment related documents that eased part of the investment process. These documents—a revised version of a new catalogue of investment projects subject to government approval and a detailed explanation of the revisions—appear designed to mirror reforms included in the third plenum and the Shanghai Free Trade Zone, and seek to streamline investment management by lowering the level of government scrutiny applied by the NDRC to proposed investment projects, both inbound and outbound, for many sectors.

The new catalogue reduces the number of sectors requiring government approval of the feasibility study, thus removing NDRC and its local counterparts’ approval as a step in the set-up process for some foreign investment projects. Companies investing in projects not listed in the catalogue will merely have to file their investment documents with relevant NDRC or local investment departments rather than seek active approval. Most importantly, the revised catalogue and accompanying explanation specifically state that these provisions would apply to both foreign and domestic companies—meaning that some foreign investors could benefit from a simplified NDRC approval process. While this is a step towards streamlining approvals, the revisions will have a limited impact on the foreign investment approval process in light of additional approvals and licenses required by other ministries and agencies that remain unchanged, and the fact that the approval step will be retained for investments in controlled sectors.

New “negative list” approach may speed up the establishment process for many new foreign investment projects

The revised catalogue—known in full as the Catalogue of Investment Projects Subject to Government Ratification—officially took effect on December 2, replacing the 2004 version. This catalogue is separate from the more widely known CGFI. Whereas the latter catalogue focuses on determining and classifying which sectors foreign investors are permitted to invest in and under what conditions, the government ratification catalogue instead focuses on NDRC’s administrative processes. This catalogue divides specific investment projects into two categories: those that require approval by government entities (known in Chinese as hezhun) and those that need only to be filed with the relevant government agencies (bei’an). Changes in this round of revisions move more projects into the filing-only category, speeding the investment process for affected areas of foreign investment.

The NDRC explanation of the revised government ratification catalogue states that foreign investment projects are to use a “pre-establishment” and a “negative list” approach, reflecting commitments made by Chinese policymakers about their approach to a US-China Bilateral Investment Treaty and the newShanghai Free Trade Zone. According to NDRC’s releases, foreign investment projects in the CGFI’s “restricted” category and Chinese majority-controlled investment projects in the “encouraged” category will continue to require NDRC approval at either the central or the provincial government level. Further USCBC conversations with NDRC indicate that these sectors continue to require further scrutiny because they fall in sensitive sectors. Those foreign investment projects that fall outside of these criteria and are not listed in the catalogue itself will be permitted to use the quicker filing process instead.

However, USCBC discussion with NDRC officials regarding the catalogue reveal that the revisions will not impact the approval and licensing requirements of other key regulators. While revisions in the catalogue will reduce the amount of time and paperwork required by the NDRC or its local counterparts for qualified foreign investment projects, foreign companies will still be required to receive administrative approvals and licenses from other relevant regulators, such as an approval certificate from the Ministry of Commerce (MOFCOM), a business license from the Administration of Industry and Commerce (AIC), along with industry-specific licenses.

According to USCBC analysis of individual revisions, adjustments in the catalogue will affect investment in a broad set of sectors including energy, transportation, and light industry. Notable changes in the revised catalogue include:

  • Energy  The new catalogue decentralizes approval for specific atomic, thermoelectric, and all wind power station projects. It also moves some coal-based fuel projects to the record-filing system, and now requires companies with oil and gas concessions to file with the State Council.
  • Transportation  Notably, the new catalogue removes airport expansion projects from the catalogue, meaning they will now be subject to the record-filing system. It also decentralizes approval for certain maritime container terminal projects.
  • Information technology  Provisions on postal services and the manufacturing of certain electronic communication products (satellite television receivers and certain mobile communication systems and terminals with special provisions) have been removed.
  • Raw materials  Revisions remove provisions on certain non-ferrous metal mining and certain petrochemical projects. The catalogue also decentralizes approval for gold mining operations.
  • Machinery manufacturing  Changes remove provisions for investment in certain shipbuilding facility projects.
  • Light industry  The new catalogue removes provisions on pulp, denatured fuel, ethanol, polyester, salt, and sugar projects, subjecting them to the record-filing process.
  • Construction  New provisions decentralize approval for urban high-speed rail projects and remove specific water supply projects.
  • Social services  Revisions decentralize approval for tourism and conservation developments in certain scenic areas, nature reserves, and historical sites.

Despite these changes, many projects are still subject to central government approval. Additionally, some approval requirements were raised to the central level for some projects, including coal mining projects and investment in fertilizer projects. During an online Q&A session, Deputy Director of the Fixed Asset Investment Department of the NDRC  Luo Guosan noted two main categories of projects that remain in the catalogue: large-scale basic infrastructure projects, due to their impact  on national security and the environment and industries experiencing overcapacity. The latter category is in line with the emphasis on addressing overcapacity raised during China’s recent Central Economic Work Conference.

Revisions ease approvals for outbound investment

Changes made to the revised catalogue also raise the investment thresholds for central government approval. According to the accompanying explanation, all outbound investment projects under $1 billion or in areas deemed “sensitive”—likely threatening national economic and security interests—will be exempt from the approval process system, and will require only filing. The change will replace the previous thresholds of $30 million for resource development investments and $10 million for “non-resource” investments. Additionally, previous outbound investment measures that required MOFCOM approval for investments of over $100 million will no longer apply, said Luo in the NDRC Q&A session. The new threshold should simplify administrative procedures for a large number of outbound investment projects. Additional changes to outbound investment provisions relax requirements for state-owned enterprises, allowing them to file applications to establish overseas subsidiaries as opposed to getting MOFCOM approval.

Changes mark progress, but questions remain for foreign investors

While the revised catalogue does not expand or contract market access for foreign companies, it represents some progress in simplifying administrative approval procedures. The biggest effect will be for potential foreign investors in “encouraged” and “permitted” categories that allow the establishment of wholly foreign-owned enterprises (WFOEs) and foreign-majority joint ventures (JVs). Companies that fit in this category stand to benefit from adjustments in the revised catalogue that simplify the NDRC approval process.  For foreign investors in China, the shift to a negative list approach has additional advantages, as it explicitly limits the number of sectors that must receive government approval and allows emerging sectors that may not already be listed the government ratification catalogue or CGFI a more favorable investment environment.

However, these revisions will be limited to the NDRC approval process and may not address some of the most troublesome sectors for foreign investment. Many priority sectors for foreign investors—such as agriculture, aviation, financial services, and transportation—require the formation of Chinese majority-owned joint ventures. Therefore, they are still subject to the NDRC approval process. Additionally, the revisions to the catalogue will have a limited impact on the overall investment approval process for foreign companies, as they will still need to receive approval from other ministries such as MOFCOM and the AIC. 

Looking forward, the NDRC has made it clear that it will work with relevant ministries to push for further simplification of the approval process. During the NDRC online Q&A session, Luo pointed out that relevant government ministries have already begun to issue new policies aimed at further streamlining the approval process, in line with central government initiatives released during the third plenum. For example, NDRC and five other ministries released a notice on January 3 that reduces preconditions for approval, simplifies approval criteria, reduces approval times, and increases transparency. The notice applies to departments responsible for land approvals, environment impact assessments, and other preliminary approvals. While the notice included few details regarding implementation, Luo indicated that the next step will be to issue more detailed measures.