China’s 2017 Foreign Investment Catalogue Opens Access to New Industries
By Alexander Chipman Koty and Zhou Qian
On June 28, China’s National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) released the 2017 version of the Catalogue for the Guidance of Foreign Investment Industries (the Catalogue). The Catalogue, which will come into effect on July 28, introduces a national negative list to guide foreign investment, and cuts the number of special administrative measures restricting foreign investment from 93 to 63, compared to the previous 2015 version.
Industries with foreign investment restrictions eased or removed in the new Catalogue include rail transportation equipment, motorcycles, new energy vehicle batteries, civil satellites, unconventional oil and gas development, and credit investigation and rating services. Additionally, a handful of high-tech industries, such as virtual reality (VR) and augmented reality (AR) devices, have been given special incentives to encourage foreign investment.
Although the new Catalogue opens a variety of new industries to foreign investment, several key industries such as banking and securities, healthcare, and telecommunications remain highly restricted, leading to ongoing criticism from the foreign business community over China’s closed markets. However, while differences may remain in the treatment of domestic and foreign investments, those operating in the Catalogue’s freshly opened sectors will find appealing new opportunities for investment.
Negative list introduced nationwide
The negative list specifies the industries in which foreign investment is restricted or prohibited. Those falling under the “restricted” category are subject to restrictions such as shareholding limits, and must receive prior approval from MOFCOM. Industries in the prohibited category are closed completely to foreign investment.
For any industry not listed on the negative list, foreign investors are given equal treatment to domestic Chinese investors. To be noted, domestic investors still face restrictions in certain industries, like telecommunications and education. Although foreign investors do not require prior approval from MOFCOM in industries outside the negative list, they are still subject to record-filing requirements.
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The Catalogue also has an “encouraged” category, which lists industries specifically encouraged for foreign investment. Encouraged industries benefit from special incentives, such as reduced tax rates. Encouraged industries can still be subject to certain restrictions on foreign investment if they are also on the negative list, however. For example, design, manufacturing, and repair of general-purpose airplanes is encouraged, but also restricted to joint ventures (JVs) with a Chinese partner entity.
The negative list clarifies which industries need prior approval from MOFCOM. Previously, some industries under the “encouraged” category required MOFCOM approval, but did not appear under the “restricted” category. Now, every industry that requires MOFCOM approval is clearly listed on the negative list.
The concept of a negative list to guide foreign investment had been piloted in China’s free trade zones (FTZs) since the Shanghai Pilot FTZ was launched in 2013. A new negative list governing foreign investment in China’s FTZs was released on June 16.
Foreign investment restrictions relaxed
Special administrative measures in a variety of industries have been removed in the new Catalogue.
- Manufacturing of rail transport equipment
- R&D and manufacturing of automobile electronic network and electronic controllers for electric power steering systems
- Manufacturing of high energy power batteries for new energy automobiles
- Manufacturing of motorcycles
- Design and manufacturing of civil satellites, manufacturing of civil satellite payload
- Processing of edible oil and fats from soybean, rapeseed, peanut, cottonseed, camellia seed, sunflower seed, and palm
- Processing of rice, flour, and crude sugar, and deep processing of corn
- Manufacturing and repair of marine engineering equipment (including modules)
- Manufacturing of low and medium-speed diesel engine and crankshafts for vessels
- Manufacturing of liquid biofuel (fuel ethanol, biofuel)
- Manufacturing of blade electric vehicles (BEVs)
- Operation of highway passenger transport services
- Operation of ocean shipping tally companies
- Operation of credit investigation and rating services
- Operation of accounting and auditing services
- Establishment and operation of comprehensive water conservancy projects
- Construction and operation of large-scale agricultural product wholesale markets
- Exploration and development of oil shale, oil sands, shale gas, and other unconventional oil and gas
- Exploration and mining of precious metals (gold, silver, platinum)
- Lithium mining and mineral processing
- Smelting of rare metals, including tungsten, molybdenum, tin (excluding tin compounds), and antimony (including antimony oxides and antimony sulphides)
Newly encouraged industries
In addition to the industries with special administrative measures removed, the Catalogue adds six new industries to the encouraged category:
- Manufacturing of intelligent emergency medical rescue devices
- R&D and manufacturing of virtual reality (VR) and augmented reality (AR) devices
- Establishment and operation of city parking facilities
- Development and manufacturing of key components for 3D printing devices
- Construction of hydrogen refueling stations
- Manufacturing of hydrographic monitoring sensors
New investment restrictions
While the Catalogue relaxes restrictions in a variety of industries, general aviation – including common airlines for agricultural, forestry, and fishing – and banking face tighter regulation with the update. Additionally, the following industries now fall under the “prohibited” category:
- Aerial photography mapping
- Editing and publishing of books, newspapers, and periodicals
- Editing, publishing, and production of audio-visual products and electronic publications
- Radio, television video-on-demand businesses, and satellite television broadcasters receiving facility installation services
- Internet public information services
- Research institutes of humanities and social sciences
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Assessing the new Catalogue
The final 2017 Catalogue is very similar to the draft that was released for public comment in December 2016, bearing only minor changes. It is also reminiscent of the recently released FTZ negative list, which eased restrictions in a similar – though broader – range of industries.
The easing of restrictions in emerging industries, such as blade energy vehicle manufacturing and batteries for new energy vehicles is significant, and could be a precursor to further liberalizations in China’s automobile industry. Greater access for foreign accounting and auditing firms and credit investigation and rating services has also been long awaited, and could provide China with more accurate risk assessments in its enormous debt market. Meanwhile, foreign investors can benefit from strong government support in emerging tech industries like VR device R&D and manufacturing.
However, while the relaxations are welcomed by foreign investors, they are not as ambitious as many in the foreign business community have anticipated. The European Chamber of Commerce in China, for example, stated that the Catalogue falls short of expectations, and that they would like to see it removed entirely in favor of a shorter and more simplified negative list.
Many of the relaxed industries are already dominated by domestic Chinese companies, such as rail transport technology and motorcycle manufacturing. Although several high-tech industries are encouraged, China’s treatment of foreigners in these sectors can be controversial.
Further, almost a third of the industries with restrictions removed in the Catalogue are not actually any more open to foreign investment. Although the Catalogue removes restrictions on 30 industries, 12 of them were only removed because they are included in the Market Access Negative List issued in March 2016, which takes precedence over the Catalogue. The Catalogue also increases restrictions on foreign investment in certain fields, including internet publishing and online media.
The changes come as China’s leadership touts its support to reform and opening up and attracting more foreign investment. President Xi Jinping made a highly publicized speech in Davos earlier this year pledging China’s commitment to trade and globalization, and Premier Li Keqiang recently remarked that the actual use of foreign capital declined this year, showing the need for greater reform.
Such pronouncements by China’s top leadership since the initial draft Catalogue was released left some observers hopeful for more ambitious liberalizations in the final version. Although the changes found in the Catalogue are ultimately somewhat modest, more policies on economic reform may be announced at the upcoming 19th Party Congress to be held in Beijing this fall.
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