Investment Opportunities in China Open Up Following Regulatory Changes

September 19, 2017 Posted by China Briefing Reading Time: 6 minutes

Recent reforms to China’s foreign investment regime have lifted ownership restrictions and offered new preferential policies in a number of industries.

The updated Catalogue of Industries for Guiding Foreign Investment (Catalogue) and Free Trade Zone (FTZ) Negative List, both released in June 2017, remove a variety of restrictions on foreign investment, offering new opportunities for businesses previously handcuffed from doing business in China.

New opportunities arise in different contexts. Domestic demands, such as environmental and energy needs, have led the government to remove restrictions on certain industries, while policies to encourage the development of strategic sectors have driven other reforms.

This article outlines some of the intriguing new industry opportunities emerging because of the latest regulatory changes.

New energy vehicles

Both the Catalogue and FTZ Negative List lift restrictions on electric vehicle manufacturing and related industries. China’s automobile industry has historically been restricted to foreign investment, with foreign companies required to enter a JV with a domestic partner, who must own at least 50 percent equity. Foreign companies are also limited to only two JVs for manufacturing whole and special use vehicles.

However, foreign companies can now establish more than two JVs, if manufacturing electric whole vehicles, and are no longer required to use their own brands. Additionally, the Catalogue removes special administrative measures on the manufacturing of energy power batteries for new energy automobiles.

Further liberalizations and incentive schemes could emerge in the near future: on August 16, the State Council released directives urging relevant ministries to promote FDI in new energy vehicles, among other industries.

China is already the world’s largest new energy vehicle market. By 2020, China aims for new energy vehicles sales to reach two million, and to account for 20 percent of all vehicle production and sales by 2025.

Although China’s auto industry is still restricted, domestic companies’ need for foreign technology and strong government support make new energy vehicles a growth industry for foreign businesses.

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Virtual reality and augmented reality devices

The Catalogue places research and development (R&D) and manufacturing of virtual reality (VR) and augmented reality (AR) devices under the encouraged category. VR/AR systems are still emerging technologies, and China aims to become a leader in the industry.

Although China has many innovative homegrown tech firms, the country still lags behind tech leaders such as Japan and the US for many core technologies and R&D proficiency. As such, the Chinese government sees foreign investment as a way to spur domestic capabilities and move up the value chain; China offers incentives, such as reduced corporate income tax rates, and tax holidays, to attract this investment.

China is already home to hundreds of VR and AR startups, mostly concentrated in the tech hub Shenzhen, many of which Chinese tech giants, such as Alibaba and Tencent, fund and support. A white paper published by the Ministry of Industry and Information Technology projects that the value of China’s VR industry will grow from RMB 5.66 billion (US$848 million) in 2016 to RMB 55 billion (US$8.2 billion) by 2020.

Thanks to generous financial incentives and robust growth potential, foreign investment in China’s emerging VR/AR industry has intriguing prospects.

Professional and financial services

Changes in the Catalogue and the FTZ Negative List reduce restrictions in a number of professional and financial services. The new Catalogue and FTZ Negative List both remove credit investigation and rating services entirely, which gives foreign companies the same access as domestic companies.

Further, although the update removes accounting and auditing services from the encouraged category, it also eliminates the Chinese nationality requirement for a principal partner. While accounting and auditing services no longer benefit from special incentives, foreign firms in the industry now have more flexibility than ever.

To the dismay of many foreign governments and financial institutions, the Catalogue did not loosen restrictions in the financial services industry. In the case of the FTZ Negative List, however, the changes cut some minor restrictions and made others more detailed. While on the surface the updates show limited progress, in practice the more detailed restrictions could make China’s financial services industry more accessible.

Previously, rules that were more general made both foreign firms and local regulators unsure of the exact boundaries of permissible business activities and other regulatory requirements. With the detailed descriptions of restrictions and requirements in the new FTZ Negative List, firms and regulators have a more complete understanding of market entry requirements and scope for business.

For example, the 2015 Negative List gave foreign investors vague asset requirements, whereas the 2017 update gives specific figures. Such changes, though seemingly minor, could be the difference for financial institutions looking to make the leap into China.

General aviation

Foreign businesses in FTZs can now design, manufacture, and repair general aircraft that have less than nine seats and are not heavier than 6,000kg. Although foreign businesses are restricted from developing larger aircraft, they can now participate in a segment of the industry that analysts predict will grow rapidly in the coming years.

According to the General Aviation Manufacturers Association, China currently has just 0.03 aircraft per 10,000 people, while the US has 6.5. However, the government has ambitious plans to grow the industry.

In 2016, the State Council announced that China aims to increase the number of general aviation airports from 300 to more than 500 and the number of general aircraft from 1,874 to 5,000 aircraft by 2020. That year, the government expects the industry’s market scale to reach RMB 1 trillion (US$150 billion).

Several different subsectors of general aviation will together drive this growth, ranging from private consumption and tourist services to agricultural uses.

More reforms on the horizon

Most industries historically subject to heavy restrictions, such as telecommunications, finance, and healthcare, remain highly regulated. However, while restrictions still exist in many industries, the latest round of liberalizations allow foreign investors to participate more deeply than before. Meanwhile, other industries are now completely open to foreign investment, and those on the encouraged list benefit from special incentives.

Beyond the recent liberalizations, the State Council announced in early August that it will unveil a timeline to further open up more industries to foreign investment, including finance and ship design, among others. Foreign investors should therefore monitor for announcements from the government, as more sectors may be poised for reform and liberalization as China approaches the 19^th Party Congress this October.

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