Introduction

National Development and Reform Commission and Ministry of Commerce, in China releases a "Catalogue for the Guidance of Foreign Investment Industries" circular (hereinafter refers to as “Catalogue”) on 31st Oct 2007, with effect on 1st Dec 2007. Meanwhile, the Catalogue for the Guidance of Foreign Investment Industries as promulgated by the former State Development Planning Commission and the Ministry of Commerce on 30th March 2004 shall be annulled.As the basis for the guidance of examination and approval of foreign investment projects, the adjustment of the Catalogue will impact the direction of foreign investments in China. According to government policies, this is so in order to be consistent with the national economic development of China and the protection of the interests of foreign investors.

Comparison of the Catalogue (Amended in year 2004 and 2007)

In the Catalogue, foreign investments are categorized into 4 types as follows.

Difference On 4 Categories of Foreign Investment

• Encouraged Investment
  Typically, investments that may bring about technology transfer or IT advancement are encouraged investments. This type of foreign investors is normally encouraged to establish Wholly Foreign-owned Enterprises (WFOE) and to apply for preferential treatment, tax incentives and financial subsidies.
  
• Prohibited Investment
  Prohibited investments are normally in industries which are related to government security and social interests. The foreign investors in this type normally will set up Representative Office (RO) to study the Chinese market, conduct liaison and marketing promotion for the parent company within its defined business scope.
  
• Restricted Investment
  Foreign investments are still restricted in certain industries in terms of equity interests, shareholders, or other conditions. Like in some industries, foreign investors are allowed to venture into China market. However, they can only set up joint ventures together with the local Chinese partners to run the business.

• Permitted Investment
  Investment projects that do not fall under the first three categories will be regarded as permitted projects. Generally, foreign investors can conduct permitted projects by establishing WFOEs.

In new Catalogue (07 Version), there are 478 categories, including 351 encouraged investment, 87 restricted investments and 40 prohibited investment. Comparing with the Catalogue (04 Version), there are 94 additional encouraged investments, 9 additional restricted investments, and 5 additional prohibited investments. In reality, encouraged investment increased by 37%.

Difference On Specific Industries

In general, as stated in new Catalogue (07 Version), there are four directions for foreign investments in China:

• For the manufacturing industry, foreign investments in high technology industry, new materials production are further encouraged.
• For the service industry, apart from reducing some of the original restrictive items and prohibited items, services outsourcing and modern logistics are newly added into the encouraged investment.
• With regards to traditional production industries in which the country has developed mature technologies and higher production capabilities, foreign investments are no longer encouraged.
• Due to the rapid increase of trade surplus and foreign currency reserves, purely export orientation policy would not be supported any longer.

Hereby, we list out a few industries, which have been adjusted in the Catalogue (07 Version).

• Construction and Management of Electric Power Network
  In the Catalogue (07 Version), electric power network is changed from prohibited investment in the Catalogue (04 Version) to restricted investment. The new Catalogue (07 Version) allow foreign invertors to participate in the construction and management of electric power network via joint ventures with local Chinese partners. But the local partner shall hold the majority of shares. In the Catalogue (04 Version), investment in these industries were prohibited.

• Mining and Quarrying Industries
  For the purpose of the protection of natural resources, the Catalogue (07 Version) illustrated a material adjustment in its strategies towards mining industry for foreign investors. For the critical scarce or non-reproductive mineral resources, foreign investments are no longer encouraged to explore, with extra control on the projects producing serious pollutions. Furthermore, exploring and mining of several non-reproductive essential resources are prohibited to foreign investments. Apart from that, exploring and mining of some kinds mineral resources which were listed in the encouraged items under the Catalogue (04 Version) are no longer encouraged under the Catalogue (07 Version).

• Cements
  The Catalogue (07 Version) shows that China no longer encourages foreign investment in traditional manufacturing industries and critical scarce or non-reproductive mineral resources. In contrast, foreign investors are encourage to enter into the cement industry despite of cement being a kind of traditional manufacturing and mining industries.
  
  Production of high level fire-proof material used in furnaces cement kiln, and environmental protection disposal of industrial and domestic waste using new dry cement kiln have been newly included as encouraged industrial activities.

• Equipment for Railway Transportation
  The railway transport facilities shall be opened entirely to foreign investments. It becomes encouraged sector to foreign investments in the Catalogue (07 Version) in despite of previous restrictions.
  
  However, these investments are limited to equity joint ventures and contractual joint ventures and Chinese parties should hold the majority of shares. For instance, there is a new additional of “Comprehensive maintenance of basic facilities of high-speed railway, passenger railway lines and intercity railway lines” to the encouraged industries in the current catalogue. For this investment, the pre-condition is Chinese parties shall act as the major shareholder and hold the managing rights.
  
  As demonstrated in the Catalogue (07 Version), foreign investment has ventured beyond vast industries, from research and development, production, complement products manufacturing to maintenance.

• Futures Industry
  According to the Catalogue (04 Version), investments in futures firms are prohibited to foreign investments. As of 1 st December 2007, foreign investors may invest in futures companies via set up of joint ventures. However, similar to other financial sectors, the Chinese party shall hold the majority of shares and the management rights despite the switch of investments in futures firms from being prohibited to restricted.
  
  Another essential adjustment has been made to foreign investments in securities companies and insurance companies. According to the Catalogue (04 Version), besides being restricted from foreign investments, proportion of foreign investments in securities companies shall not exceed 1/3 of the registered capital. As for the new catalogue (07 Version), apart from maintaining the original restrictive conditions, a new term was amended i.e. securities companies shall be “limited to underwriting of A-grade shares, underwriting and transactions of B-grade and H-grade shares, government bonds and company bonds”.
  
  Insurance companies are also restricted to foreign investments according to the Catalogue (04 Version). It stipulated that the proportion of foreign investments in non-life insurance companies should not exceed 51% while the proportion of foreign investments in life insurance companies should not exceed 50%. Under the Catalogue (07 Version), however, the restriction where proportion of foreign investments should not exceed beyond 50% only stands for life insurance companies, and no further investment proportion requirement is imposed upon non-life insurance companies.

• Construction and Management of Golf Course
  Foreign investment is not permitted to venture into this industry like before. The industry is under prohibited investment.
  
  Besides that, according to the Catalogue (07 Version), news websites, network video and audio program services, internet services site, internet culture management are prohibited to foreign investors.

• Construction of Real Estate Property
  In comparison to the Catalogue (04 Version), the Catalogue (07 Version) has witnessed several changes in policies towards foreign investments in China’s real estate properties.

• Firstly, foreign investment in “development and construction of ordinary residential estates” has ceased to be encouraged.
• Next, “real estate transactions in second grade and housing agencies or brokerage companies” are now restricted to foreign investments.
• Thirdly, “development of pieces of land (limited to equity joint ventures and contractual join ventures)” and “construction and management of high-end hotels, villas, high-class office buildings and international exhibition centers” remains restricted to foreign investments.
• Fourthly, elimination of “construction and management of large theme amusement parks” from restricted industries items to foreign investments.

Conclusion

From the differences between the Catalogue (07 Version) and the one (04 Version), we can tell that Chinese government would prefer to encourage the foreign venture in the areas which benefits economics, environment and long-term development of China. In the long term, the foreign investors have more chance to come into industry like service, high technologies, equipment manufacturing, new materials manufacturing and others.