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China Revises Foreign Investment Catalog

Dezan Shira & Associates
Posted: 24th August 2011 09:10

Following the principles in the State Council document “Opinions on Further Improving the Work of Utilizing Foreign Investment,” China’s National Development and Reform Commission (NDRC) has recently added a number of changes to the “Foreign Investment Catalog.”

Initially introduced by the NDRC and the Ministry of Commerce in 1995, the “Foreign Investment Catalogue” has been revised four times so far, with the most recent version updated in October 2007. Stipulating “encouraged,” “restricted” and “prohibited” categories that distinct foreign invested projects fall into, the Catalog has long been a major guideline of China’s market openness strategies. The newly released revisions, following the disclosure of China’s 12th Five Year Plan, arrive at a significant timing. Not only do they reflect China’s commitment to continue opening its market to foreign investment, but they also show China’s attempts to better utilize foreign investment for the country’s own industrial upgrade and national security interest.

  • It may interest many foreign investors that the new revisions have added more environmentally-friendly and high-end projects to the “encouraged” category. The potential changes are as follows:
  • As a major energy consumer in dire need of alternative resources, China further encourages foreign participation in unconventional natural gas resource exploration and exploitation. While the old Catalog only encouraged the exploration of seabed combustible ice, the new changes added shale gas to the list. However, what is noticeable is that only businesses in cooperative joint ventures are “encouraged” in this area.
  • New energy utilization is rising as one of China’s top interest while attracting foreign investment. New energy-related industries, including high-tech green battery manufacturing and the construction and operation of renewable water plants, have all become new additions to the “encouraged” Catalog.
  • Energy efficient industries and green technologies are further highlighted in the “encouraged” list. Seeing a surging amount of automobiles and carbon dioxide emission at the same time, China tends to place more emphasis on new energy automobile development in the revised Catalog. The manufacturing of new energy cars’ key parts and components – including high energy batteries, anode battery materials, battery separators, battery management systems, motor management systems, and electronic control integration of electric vehicles – is added to the “encouraged” list. However, such incentives only stand for projects with a foreign invested portion of no more than 50 percent. It is also an interesting contrast that the previously encouraged whole vehicle manufacturing as well as automobile research and development (R&D) center establishment have been taken out of the list, showing the country’s interest alteration in this field.
  • Foreign investors are now also encouraged to take the opportunity of extending their businesses into the R&D as well as manufacturing of new light-weight and environment friendly materials for aviation and aerospace use, while according to the old Catalog, they only received incentives for reaching fields of automobiles and motorcycles.
  • As the largest world factory in upgrade, China now welcomes more foreign projects on high-end manufacturing and high-tech introduction. Related newly added items include: (a) gear transmission manufacturing used for wind power, nuclear power or high speed rail; (b) production equipment designing and manufacturing for automobile batteries; (c) development and manufacturing of next generation internet system equipment, terminal equipment, testing equipment, software, and chips based on IPv6; and (d) construction and operation of vehicle charging as well as battery replacement stations.
  • With increasing emphasis on the country’s financial openness and intellectual property rights (IPR) protection, the revised Catalog encourages foreign investment in venture capital companies and IPR services for the first time. Foreign investment in financial leasing and medical institutions – although not listed as “encouraged” – is not limited anymore.

While so many newly-added encouraged items are energy related, it is not hard to understand that China wants to further restrict projects that require heavy energy consumption or cause elevated levels of pollution. Atmospheric and vacuum refineries with an annual output below 10 million tons, catalytic cracking with an annual output below 1.5 million tons, continuous reforming (including aromatics extraction) with an annual output below 1 million tons, and hydrogen cracking production with an annual output below 1.5 million tons have all turned into projects in the “limited” category, where foreign investors will find it more difficult and time-consuming to obtain approvals for related projects from Chinese authorities.

The newly added “prohibited” items are highly related to China’s current social issues and national interest. As a result of China’s stricter controls on its housing bubbles, the foreign investment in the construction and operation of villas is moved from the “restricted” category to “prohibited” list. In addition, fresh foreign investors will also be excluded from China’s domestic express mail delivery businesses in the future.

Dezan Shira & Associates is a specialized foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence service to multinationals investing in China, Hong Kong, India, and Vietnam. Established in 1992, the firm is a leading regional practice in Asia with nineteen offices in four jurisdictions, employing over 170 business advisory and tax professionals.
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