CHINA: MOFCOM invites comments on draft foreign investment catalogue on encouraged, restricted and prohibited industries

Tuesday December 13 2016

On 7 December 2016, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly released for public comment, the latest revised draft of the Foreign Investment Industrial Guidance Catalogue (catalogue). The deadline to submit comments is 6 January 2017.

Background

Since the Catalogue was first issued in 1995, it has been fundamental to the regulation of foreign investment in China. On 1 October 2016, China removed the requirement to obtain approval from MOFCOM or its local branches for projects which do not fall within a negative list. However, no separate negative list has yet been issued and instead, reference has been made to the 2015 Catalogue.

Main Changes

Under the 2015 Catalogue, industries were classified under the following categories:

(a) encouraged;
(b) restricted;
(c) prohibited; and
(d) permitted (industries not expressly listed in the Catalogue)

Under the revised Draft Catalogue, industries are categorised into two main headings:

(a) encouraged; and
(b) negative list. This negative list section is further divided into three categories:

• Industries under the encouraged category but subject to restrictions on foreign equity holding;
• Industries under the restricted category; and
• Industries under the prohibited category.

If a foreign investor wishes to identify whether their investment falls within the negative list (and requires MOFCOM approval), it should refer to the negative list section. Compared with the 2015 Catalogue, where references to these items are scattered throughout, such amendment provides easier reference and clearer guidance to foreign investors.

1. Encouraged Category

Restrictions on foreign equity holdings have been removed for a number of industries (i.e., 100% foreign ownership is permitted), including in:

• manufacturing and R&D of automobile electronic bus network technologies and electronic controllers for electric power steering systems;
• manufacturing of new energy automobiles power batteries. This has been changed from an encouraged industry to a permitted one; and
• manufacturing of track transportation equipment. This has been changed from an encouraged industry to a permitted one.

Under the Draft Catalogue, encouraged industries with restrictions on foreign equity holding also appear under the new negative list section. The Draft Catalogue clarifies that while these industries are subject to the applicable foreign equity restrictions, they will continue to enjoy preferential policies available to any encouraged industry (such as tax reduction on imported equipment).

2. Restricted Category

Several industries, including those listed below, have been removed from the restricted category and amended to permitted industries:

• highway passenger transportation services;
• credit investigation and evaluation services;
• exploration and exploitation of precious metals;
• processing of rice, flour and crude sugar;
• processing of edible oil and fats. The restriction on foreign equity holdings have also been removed;
• production of biological liquid fuels. The restriction on foreign equity holdings have also been removed; and
• motorcycles manufacturing. The restriction on foreign equity holdings have also been removed.

The draft catalogue has reduced the restricted category by 11 industries. However, some of these industries have been removed from the Draft Catalogue because they are restricted to both foreign investment and Chinese investment and have already been covered by the Draft Pilot Market Access Negative List (市场准入负面清单草案 (试点版)) circulated in March 2016, which applies to any investment in China (whether foreign or not). These sectors include, for example, construction and operation of large-scale theme parks (大型主题公园建设、经营).

3. Prohibited Category

Similarly, several prohibited industries have been removed from the Draft Catalogue because they are prohibited to both foreign and Chinese investment, such as construction of golf courses and villas, gambling and lotteries.

Effect on Investors

The Draft Catalogue clarifies that foreign investors are not allowed to set up a foreign-invested partnership in any restricted industry where restrictions on foreign equity ratio exist.

The new negative list section, which has been added to the Draft Catalogue represents the most significant change. Although this represents a reorganisation of existing categories, it provides easier reference for foreign investors. The changes also reflect a move towards a regulatory regime where two negative lists will apply, one specific for foreign investment and the other which generally applies to both foreign and Chinese investment. However, the negative list section in the Draft Catalogue is still rather lengthy with very broad language on restrictions. Therefore, while the regulatory regime on foreign investment has been largely relaxed since 1 October 2016, there is still a long way to go in implementing national treatment for foreign investors.

Please click the link at the top of the page for the draft Foreign Investment Industrial Guidance Catalogue (catalogue) and to make comments thereto.