The National Development and Reform Commission released its latest draft revision to the Foreign Direct Investment Industries Guidance Catalogue in November 2014. The Guidance Catalogue regulates foreign investment in China’s industrial sectors.
The 2014 draft seeks to lift restrictions on certain forms of foreign investment and shareholdings across a wide variety of business sectors and activities. The number of restricted industrial sectors will be reduced from 79 to 35, while the number of industrial sectors limited to joint ventures and partnerships will be reduced from 43 to 11. The number of industrial sectors requiring a Chinese majority shareholder will be cut in half from 44 to 22. The changes to the Guidance Catalogue is indicative of future reforms to the foreign investment regulatory regime.
The following industrial sectors will be affected:
- Auto Manufacturing
- Education
- Infrastructure and real property
- Manufacturing
- Pharmaceutical and medical
- Services
- Telecommunications and internet
Other changes (by industrial sectors):
- Auto manufacturing
- The 2014 draft will categorize automotive, special purpose vehicles and motorcycle manufacturing to the “restricted” category. Chinese ownership cannot be less than 50 per cent while foreign investors are not allowed to invest in more than two joint ventures for the production of the same class of vehicles in China.
- This restriction signifies a trend by the regulatory authorities to gradually tighten foreign investment in the auto manufacturing, in order to support the development of domestic car brands.
- Education
- Unlike other industrial sectors, the 2014 draft imposes more stringent restrictions on foreign investment in the sector. Higher learning as well as daycare will join secondary/high school education in the “restricted” category. Ventures will be limited to joint ventures led by a Chinese party.
- Primary (compulsory) education is “prohibited” and off-limits to foreign investment.
- Manufacturing
- The 2014 draft removes the following manufacturing activities from the “restricted” category:
- Beverages
- Raw chemical materials and products
- Chemical fibre production
- General machinery
- Special equipment (excluding arms and munitions, which are still “prohibited”)
- Transportation equipment
- Communications equipment
- Computers and other electronic equipment
- The 2014 draft removes the following manufacturing activities from the “restricted” category:
- Infrastructure and real property
- The 2014 draft lifts restrictions on foreign investment in subway construction and real property projects. The construction and operation of mass transit systems are listed under the “encouraged” category and are no longer restricted by the Chinese majority shareholding requirement.
- In addition, real property projects now fall under the “permitted” category. Under the 2014 draft, propose an end to restrictions on foreign investment in the property development and the construction/operation of luxury hotels, office buildings and international convention centres.
- Pharmaceutical and medical
- The 2014 draft proposes to categorize certain over-manufactured pharmaceutical products (such as multivitamins and calcium) in the “restricted” category.
- Narcotics and Class A psychoactive drugs are to be classified as “permitted” allowing market screening processes instead of pure administrative regulation in the manufacturing process.
- Tighter controls over the establishment of foreign-invested medical institutions. The 2014 draft re-categorize medical institutions back into the “restricted” category, suggesting that foreign investment will remain limited for the foreseeable future.
- Services Sectors
- Restrictions on the entertainment industry will also be relaxed. The 2014 draft proposes that the operation of performance venues categorized in the “encouraged” category will no longer require Chinese majority shareholdings.
- The construction and operation of large-scale theme parks and entertainment venues will be categorized as “permitted”.
- Telecommunications and internet
- Under the 2014 draft, e-commerce will be listed under the “restricted” category and foreign investment may not exceed 50 per cent. As such, it will be interesting to see whether the Shanghai FTZ will further lift restrictions on foreign investment to above 55 per cent, or whether the rest of China will follow the 55 per cent threshold set by the SFTZ.
- The development and application of ‘technologies related to ‘the Internet of Things’ has been added to the “encouraged” category for the first time. This new addition is in line with the Central government’s efforts to achieve a leading advantage in the mobile internet era.
- However, internet publishing-related services remain “prohibited”.