With Revised Guidance Catalogue, China Introduces Sweeping FDI Reforms

November 7, 2014 Posted by China Briefing Reading Time: 5 minutes

Rectification: a previous version of this article said that foreign investment in hospitals was only allowed with a Chinese majority shareholder, whereas the new draft speaks of a cooperative joint venture. We apologize to our readers for this oversight.

SHANGHAI—On November 4, the Chinese government released the latest update to the “Catalogue for the Guidance of Foreign Investment Industries,” outlining which industries shall be encouraged, restricted or prohibited for foreign investment. A draft of the revised list has been released for public commentary until 3 December.

Inclusion on the list of encouraged industries is often coupled with the easing of restrictions on foreign investment, such as the ability to operate as a wholly foreign-owned enterprise (WFOE) rather than being restricted to a Sino-foreign joint venture (JV). The revised Catalogue newly permits WFOEs in the following industries:

Traditional Chinese medicine
Oil field exploration and development
Automobile parts
Aircraft engines and components
Vessel engines and components
Equipment manufacturing for air traffic control systems
Accounting and auditing

Meanwhile, foreign investors will soon be allowed to act as the controlling shareholder in JVs engaged in the following industries:

Manufacturing of ground-based and water-based aircraft
Design and manufacture of vessel cabin machinery
Design and manufacture of civil satellites
Construction, maintenance and operation of railways
International sea transportation
Operation of performance venues

Overall, the 2014 Guidelines are set to lift restrictions on foreign investments across a wide array of sectors, with the number of restricted items more than halved, from 79 to 35. Here we provide a summary of the major changes compared to the 2012 Guidelines. For more details on how your business may be specifically affected, please contact us at china@dezshira.com.

For starters, most restrictions on the mining industry shall be lifted, with only the mining of special and rare types of coal, lithium, granite and precious metals being restricted to investment with a Chinese controlling partner. The previous prohibition on foreign investment in the rolling and smelting of non-ferrous metals will be removed as well.

Nearly all restrictions on manufacturing are to be withdrawn as well, the only major exceptions being the processing of edible oils and fats, production of biological fuels (e.g. ethanol), smelting of rare metals and rare earth elements, and the manufacture and repair of vessels. Prior to these changes, foreign investment in the production of numerous types of batteries was forbidden, as was any investment into traditional Chinese tea – both of which will now be open to investment.

Investment in the finance industry is also to be considerably liberalized. There will no longer be limitations on foreign investment in finance companies, trust companies, currency brokerages and insurance brokerages. Foreign investment in banks would now be allowed as well, provided that no single financial institution or entity controlled by such an institution may control over 20 percent ownership of a Chinese commercial bank. Furthermore, foreign financial institutions combined may not own more than 25 percent of the shares of any bank. Lastly, only foreign banks (rather than other types of foreign companies) may invest in rural commercial banks.

Restrictions on investing in securities companies are to be eased as well. Foreign investors will now be allowed to invest in securities companies underwriting and sponsoring RMB-denominated ordinary shares, foreign shares, government bonds, corporate bonds, as well as brokering foreign shares, government bonds and corporate bonds. The limit of shares a foreign entity may own in such a company has also been raised from one-third to 49 percent.

The real estate sector is now set to fully open to foreign investment, with previous restrictions like those on land development, and the construction of offices, high-end hotels and real estate brokerages to be fully lifted. So too with limitations on building and operating movie theaters, theme parks, recreation venues and power grids.

Foreign investors may now open and operate hospitals as cooperative joint ventures with a Chinese partner.

However, several new constraints have been added to the list. One that stands out is a new restriction on the manufacture of motor vehicles. In any JV producing vehicles, the Chinese party must now own over 50 percent of shares. Furthermore, such companies may only engage in up to two of the following three sectors: passenger vehicles, work-related commercial use vehicles (such as trucks or vehicles used in construction) and motorcycles. The latter restriction shall not apply where the third category is added via a merger or acquisition undertaken by the Chinese party.

Limitations shall also be extended to pre-school and tertiary education, where a Chinese majority shareholder is required.

The 2014 Guidelines also introduce several new prohibitions on foreign investment. These extend to the production of genetically modified plant seeds, processing of petroleum and coking, processing and production of nuclear fuel, sale of tobacco, Chinese legal consulting (restraints on non-Chinese legal consulting, however, have been completely lifted) and the operation of antique stores and auction houses selling Chinese cultural relics.

Lastly, with this document the Chinese government intends to tighten control on viewing flights over China and aerial photography, and several activities related to geographical surveying and mapping.

To learn more about the consequences of these regulations for your business, please contact us at china@dezshira.com.

A Chinese version of the new Catalog can be found here.

About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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