More Publicity And Transparency For Market Entry By Foreign Investors In China

 

17 July, 2017

 

The Catalogue of Industries for Guiding Foreign Investment (2017 Revision) (“2017 Catalogue”) was jointly promulgated by the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOC”) on June 28, 2017. This is the seventh revision to the Catalogue of Industries for Guiding Foreign Investment since its implementation. It also indicates the start of the formal application of the Foreign Investment Negative List  nationwide.

 

I. Overview of the Reform of Legal Regime for Foreign Investment

 

The Standing Committee of the National People's Congress revised four laws including the Law of the People’s Republic of China on Foreign-Invested Enterprises and the Law of the People's Republic of China on Sino-foreign Equity Joint Ventures September to October 2016. Subsequently, NDRC and MOC jointly promulgated the Interim Administrative Measures for Record Filing of the Establishment and Change of Foreign-Invested Enterprises. It is provided for in each of these laws that the process for establishing or changing foreign-invested enterprises shall be administered by record filing instead of approval procedures, as long as no special administrative measures for market entry are involved. This officially establishes the implementation of a record-filing system for foreign investment. But the special administrative measures for market entry by foreign investment in conjunction with the record-filing system for foreign investment have fallen behind this promulgation. Announcement No. 22 (“Announcement No. 22”) was jointly promulgated by NDRC and MOC, clarifying that the scope of special administrative measures for market entry by foreign investment shall include the restrictions under the Restricted Categories and the Prohibited Categories, as well as the requirements of equity percentage or qualification of senior management under the Encouraged Categories, as set forth in the Catalogue of Industries for Guiding Foreign Investment (2015 Revision) (“2015 Catalogue”).

 

In January 2017, the Circular concerning Several Measures for the Expansion of Opening-Up and the Active Use of Foreign Investment (the “State Council Circular”) was promulgated by the State Council, expressly providing for that the opening-up should be further expanded; the Catalogue of Industries for Guiding Foreign Investment and relevant rules and policies should be revised to reduce access restrictions on foreign investment in service, manufacturing, mining and other sectors; and foreign investments are supported for the implementation of the innovation-driven development strategy, the transformation and upgrading of manufacturing sectors, and  career development for overseas talents through entrepreneurship in China. 

 

In this context, the 2017 Catalogue was officially promulgated after the solicitation for public comments. 

 

II. Major Changes in 2017 Catalogue

 

1. Further Reduction of Restrictive Measures, and Expansion of Opened Sectors

 

The 2017 Catalogue has further reduced the restrictive items. There are a total of 63 items (including 35 restricted items and 28 prohibited items) subject to restrictive measures in 2017 Catalogue, which is 30 items less than the 93 items (including 19 encouraged items subject to equity percentage requirement, 38 restricted items and 36 prohibited items) in the 2015 Catalogue1. The excluded items mainly fall under manufacturing, service and mining sectors, see the table below.

 

(a)The Following Restricted Items are no Longer Included in Foreign Investment Negative List

 

(b)Removal of Restrictive Requirements under Encouraged Items

 

2015 Catalogue Encouraged Categories	2017 Catalogue
Exploration and exploitation of oil shale, oil sands, shale gas, coal-bed methane and other unconventional oil and gas (limited to Sino-foreign equity/cooperative joint venture operations)	Still Encouraged Category;  Not limited to Sino-foreign equity/cooperative joint venture operations
Utilization of mine gas (limited to Sino-foreign equity/cooperative joint venture operations)	Still Encouraged Category;  Not limited to Sino-foreign equity/cooperative joint venture operations
Automobile electronic bus network technologies (limited to Sino-foreign equity joint venture operations)	Still Encouraged Category;  Not limited to Sino-foreign equity joint venture operations
Electronic controllers for electric power steering system (limited to Sino-foreign equity joint venture operations)	Still Encouraged Category;  Not limited to Sino-foreign equity joint venture operations
Design and manufacture of civil satellites, and manufacture of civil satellite payloads (with Chinese parties as the controlling shareholders)	Still Encouraged Category;  Not limited to Chinese parties as the controlling shareholders
Manufacture of key parts and components of new energy automobiles: high energy power batteries (energy density ≥110Wh/kg, cycle life ≥2000 times and the proportion of foreign investment not exceeding 50%)	Removed;  Not included in Foreign Investment Negative List
Track transportation equipment (limited to Sino-foreign equity/cooperative joint venture operations)	Removed;  Not included in Foreign Investment Negative List
Manufacture and repair of marine engineering equipment (including modules) (with Chinese parties as the controlling shareholders)	Removed;  Not included in Foreign Investment Negative List
Manufacture of low and medium-speed diesel engines of vessels and bent axle (with the Chinese Parties holding majority of the shares)	Removed;  Not included in Foreign Investment Negative List
Accounting and auditing (the chief partner shall be of Chinese nationality)	Removed;  Not included in Foreign Investment Negative List
Construction and operation of comprehensive water control projects (with Chinese parties as the controlling shareholders	Removed;  Not included in Foreign Investment Negative List

(c)Certain Encouraged Items with Restrictive Measures are Incorporated into Foreign Investment Negative List, Continue to Enjoy Preferential Industrial Policies of Encouraged Category

 

2015 Catalogue Encouraged Categories	2017 Catalogue
Exploration and exploitation of oil and natural gas (including oil shale, oil sands, shale gas, coal-bed methane and other unconventional oil and gas) (limited to Sino-foreign equity/cooperative joint venture operations)Encouraged Category + Foreign Investment Negative List (Restricted Category) (excluding unconventional oil and gas);	Same restrictions on equity percentage
Design, manufacture and maintenance of civil aircrafts: aircrafts for trunk lines, regional aircrafts (with Chinese parties as the controlling shareholders), and general aircrafts (limited to Sino-foreign equity/cooperative joint venture operations)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Same restrictions on equity percentage
Design and manufacture of civil helicopters: those of three tons or more (with Chinese parties as the controlling shareholders)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Same restrictions on equity percentage
Manufacturing of ground-effect and water-effect aircrafts, and design and manufacturing of UAV and aerostats (with Chinese parties as the controlling shareholders)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Same restrictions on equity percentage
Construction and operation of nuclear power stations (with Chinese parties as the controlling shareholders)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Same restrictions on equity percentage
Construction and operation of power grids (with Chinese parties as the controlling shareholders)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Same restrictions on equity percentage
Construction and operation of network of trunk railway lines (with Chinese parties as the controlling shareholders)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Same restrictions on equity percentage remains
Construction and operation of civil airports (with the Chinese Parties holding a relative majority of the shares)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Same restrictions on equity percentage
Air transportation companies (with Chinese parties as the controlling shareholders, and the investment of a single foreign investor and its affiliated enterprises not exceeding 25%)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Same restrictions on equity percentage; Legal Representative must have Chinese nationality
General airline companies for agriculture, forestry, and fishery (limited to Sino-foreign equity/cooperative joint venture operations)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Limited to Sino-foreign equity joint venture operations; Legal Representative must have Chinese nationality
Scheduled or non-scheduled international marine transportation services (limited to Sino-foreign equity/cooperative joint venture operations)	Encouraged Category + Not included in Foreign Investment Negative List (Restricted Category);  Same restrictions on equity percentage

2.Structure Adjustment and Establishment of Foreign Investment Negative List

 

Another major change of the 2017 Catalogue is a structural adjustment. Different from the long-lasting three-part structure consisting of Encouraged Categories, Restricted Categories and Prohibited Categories, the 2017 Catalogue is composed of two parts: Encouraged Categories and the Special Administrative Measures for Market Entry by Foreign Investment (Foreign Investment Negative List).

 

The Special Administrative Measures for Market Entry by Foreign Investment (Foreign Investment Negative List) includes restricted items and prohibited items, consolidates certain encouraged items with restrictions on equity percentage, and deletes 11 restricted and prohibited items applicable to both domestic and foreign investment under the 2015 Catalogue, see details below.

 

Restricted/Prohibited Items Applicable to Both Domestic and Foreign Investment

–Construction and operation of, in small grids, power plants using coal-fired and steam condensation thermal generator sets with a single generator capacity of 300,000 kilowatts or less, and thermoelectric power stations using coal-fired, steam condensation and extraction thermal generator sets with a single generator capacity of 100,000 kilowatts or less

–Construction and operation of large theme parks;

–Processing of traditional Chinese medicinal materials listed in the Regulations on the Administration for Protection of Wild Medicinal Resources and the Catalogue of China's Rare and Endangered Plants under Protection;

–Ivory carving;

–Tiger bone processing;

–Construction and operation of, within mass grids, power plants using coal-fired and steam condensation thermal generator sets with a single generator capacity of 300,000 kilowatts or less, and thermoelectric power stations using coal-fired, steam condensation and extraction thermal generator sets with a single generator capacity of 200,000 kilowatts or less;

–Education institutions in military affairs, police, politics and other special fields, and Party schools;

–Construction of golf courses and villas;

–Projects endangering the safety and performance of military facilities;

–Gambling and lottery industry (including horse race tracks for gambling purposes);

–Pornography industry.

 

The promulgation of Special Administrative Measures for Market Entry by Foreign Investment (Foreign Investment Negative List) will increase the transparency of foreign investment regime in China and foreign investors may easily refer to it for restrictions applicable to investments under consideration with respect to the market entry, equity percentage and qualifications of senior management.  

 

3.Increase in Encouraged Items and Promotion of Industrial Restructuring And Optimization 

 

In addition to the reduction of restricted items, the 2017 Catalogue has increased certain encouraged items, such as, development and production of formula food for special medical use; research & development and manufacture of Virtual Reality (VR) and Augmented Reality (AR) equipment; research & development and manufacture of 3D printing equipment key components; construction and operation of hydrogen refueling stations; manufacture of intelligent emergency medical rescue equipment; manufacture of hydrological monitoring sensors; manufacture of flue gas desulfurization equipment and flue gas dust removal equipment; construction and operation of urban parking facilities; and so on – so as to further encourage foreign investment in the areas like advanced manufacturing, high technology, energy saving technologies, environmental protection technologies, etc.

 

III.Other Changes

 

In addition to the above reduction of restrictive measures and structural adjustments mentioned above, we also noted that the 2017 Catalogue has strengthened the restrictions on foreign investment in cultural areas under the Foreign Investment Negative List. For example, the 2015 Catalogue prohibits foreign investment in the publishing of books, newspapers, periodicals, audio-visual products and electronic publications; and in the 2017 Catalogue such prohibition has been expanded to include editing and publishing thereof. Furthermore, the 2017 Catalogue also added three more prohibited items, prohibiting foreign investment in radio and video on-demand businesses and satellite television broadcasting ground receiving facilities installation services; internet public information service; and the establishment and operation of humanities and social sciences research institutes.

 

The 2017 Catalogue also provides that, if any domestic company or enterprise or Chinese individual acquires a domestic company affiliated thereto by a company that it has legitimately established or controls outside China (“Affiliated Acquisition”), the resulting establishment or change of a foreign-invested project and an enterprise shall be dealt with according to the existing regulations. We understand based on such provisions that the Affiliated Acquisition shall still be subject to the approval of MOFCOM as set forth under the Provisions on Foreign Investors' Merger with and Acquisition of Domestic Enterprises. The amended Interim Administrative Measures for Record Filing of the Establishment and Change of Foreign-Invested Enterprises is still currently under the period for soliciting public comments. Upon the adoption of the amendment, the process for establishing and changing a foreign-invested enterprise (resulting from an acquisition by foreign investors falling outside the scope of the Foreign Investment Negative List) shall be subject to the record-filing system. However, the acquisition by foreign investors under the Foreign Investment Negative List shall still be subject to approval procedures. 

 

1.Response to reporters regarding Catalogue of Industries for Guiding Foreign Investment (2017 Revision) by a relevant official from National Development and Reform Commission 

http://www.ndrc.gov.cn/xwzx/xwfb/201706/t20170628_852888.html