Investment rules in China
China’s foreign investment system has evolved considerably in recent years, with many laws and reforms stemming from the country’s accession to the World Trade Organisation (WTO) in 2001. The top three industries for foreign direct investment are: manufacturing, real estate and leasing, and commercial services. Every investment project requires specific government approval, with restrictions and regulations varying across industries and regions and subject to regular change.
There are a number of key ministerial departments that foreign businesses will encounter when planning to invest in China. These are the National Development and Reform Commission (NDRC), the Ministry of Commerce of the People’s Republic of China (MOFCOM) and the State Administration of Industry and Commerce (SAIC), the State Administration of Foreign Exchange (SAFE) and the General Administration of Customs (Customs). In addition, special industry bodies include the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Tourism Administration and the Ministry of Communications, which are also responsible for granting pre-approval for industry-specific foreign investment proposals.
The NDRC and MOFCOM (or, when applicable, its local counterparts) are chiefly responsible for granting permission for foreign investment projects. The relevant authority (NDRC or its local office and Commission of Commerce) for dealing with applications is determined by the proposed amount of total investment and its categorisation as determined by the Investment Catalogue. Generally, projects with a total investment of US$100 million may require national level approval (triggering a process that is likely to be more complicated and requiring more time).
The Investment Catalogue – shorthand for The Foreign Investment Industrial Guidance Catalogue (2011) – is one of the fundamental legal documents in the regulatory regime of foreign investment in China. Therefore, it is usually the first piece of regulation to which prospective Australian investors should refer when planning to establish a business in China. The catalogue classes industry sectors according to three categories: encouraged, restricted and prohibited. Necessary approvals and the types of incentives available to foreign investors vary according to the classification, while investment in any sector that is not included in the catalogue is automatically permitted. In addition, the catalogue identifies sectors and activities for which a Chinese partner is required and (where applicable) the minimum shareholding that the Chinese partner must hold.
The NDRC released the latest revised draft of the catalogue on November 4, 2014. The draft catalogue was approved at the Third Session of the 12th National People’s Congress and is effective from April 10, 2015. The service and manufacturing sectors are now more accessible to foreign investors, with the new catalogue reducing more than half the number of ‘restricted’ industrial sectors from 79 to 38. Furthermore, the new catalogue significantly cut the number of industrial sectors restricted to joint ventures and partnerships (from 43 to 11) and halved the number of industrial sectors requiring a Chinese majority shareholder (44 to 22).
With the Chinese Government committed to improving and developing sectors and industries, a large number of the proposed changes contained in the revised draft replicate liberalised policies implemented in the pilot Shanghai Free Trade Zone (FTZ). The Investment Catalogue underscores China’s determination to extend the benefits gained from the Shanghai FTZ across the nation by allowing expanded market access and the lifting of the cap on foreign ownership. This includes applying nationwide the simplified foreign investment enterprise (FIE) incorporation procedures and regulations. It includes the law governing joint ventures (JVs) and wholly foreign-owned enterprises (WFOEs) that are currently in place in the Shanghai FTZ.
The revised catalogue permits WFOEs (rather than JVs with Chinese partners) in the following industries:
- Technology for oil exploration and development
- Automobile parts and electronics
- Manufacture of civil aircraft and vessels
- Construction and operation of subway, railway and international maritime transport
- Accounting and auditing. Other sectors added to the ‘encouraged’ list (which carries possible exemptions from tariff and import value added tax (VAT) for imported equipment, as well as a lower threshold of required government approval) include:
- Investment in aged care institutions
- Development of clean coal technology
- Culture and creative industries (incorporating industrial, architectural and fashion design).
Proposed key changes for the Investment Catalogue include significant easing of the restrictions on general manufacturing. The following sectors stand to be removed from the ‘restricted’ category, meaning foreign investment would be permitted and could be carried out without restrictions on shareholding or investment forms: beverage manufacturing, chemical raw material and products manufacturing, chemical fibre production, general machine building, special equipment manufacturing (excluding those under the ‘prohibited’ category such as arms and ammunition), transportation equipment, communication equipment, computers and other electronic equipment manufacturing.
Investment rules governing the finance industry will be relaxed, with caps on foreign investment no longer applying to trust and finance companies, or to currency and insurance brokerages. They also pave the way for less onerous or restrictive rules for investment in securities companies with foreign entities to be allowed to hold up to 49 per cent (previously 33 per cent) of Chinese companies underwriting and sponsoring RMB-denominated local and foreign equities, government and corporate bonds, as well as those involved in securities trading.
On top of this, restrictions on China’s burgeoning real estate sector are to be abolished, opening the prospect of greater foreign involvement in the construction of commercial ventures ranging from hotels and convention centres, to offices, theme parks and key infrastructure such as energy grids, as well as land development more generally. Restrictions on investment in real estate brokerages will also be removed, while foreign entities for the first time will be able to partner with Chinese companies 50:50 in owning and operating hospitals. The revamped rules will also permit foreign investment in e-commerce exceeding 50 per cent, and up to 55 per cent in such business operating within the Shanghai FTZ.
Against a general trend towards liberalisation, the revised Investment Catalogue imposes new and tighter restrictions on investment in regards to vehicle manufacturing and education. Accordingly, in a JV that produces vehicles, the local partner must retain a controlling stake. Further, such enterprises will only be allowed to make up to two of any passenger vehicles: commercial vehicles (such as trucks or those used in construction) or motorcycles. Similarly, higher education and day care operations will face the same ownership constraints, having been added to the ‘restricted’ category, meaning foreign investors can only play a role through a JV that is majority-owned by a local Chinese company. High school investment remains restricted, while foreign investment in compulsory education (for example, primary schools) is prohibited.
It is important to note that regulations can also differ depending on whether a business is operating in the Shanghai FTZ or inside any of the other special economic zones or free trade zones. The implementation of ChAFTA could also influence investment rules applying to foreign-backed operations. It is therefore strongly recommended that prospective investors consult professional advice tailored to their situation when considering investing in China.
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