In this China Law Special, we discuss the implications of the new Industrial Guidance Catalogue for Foreign Investment (“FI”). Together with existing economic regulations and policies, the catalogue guides FI during the 12th 5 year economic plan.

The newly amended Industrial Guidance Catalogue for Foreign Investment has been promulgated jointly by the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOC”) recently and will enter into force as of 30 January 2012 (“New Catalogue”). As the 6th edition of the Industrial Guidance Catalogue for Foreign Investment (“Catalogue”), this New Catalogue will be a substantial basis to guide the foreign direct investment during the 12th five-year economic plan.

The New Catalogue inherits the structure of the previous editions and is divided into encouraged, restricted and prohibited categories. Industries not included in either of the restricted or prohibited categories are open to foreign investment. The New Catalogue adds items in the encouraged categories and reduces items in the restricted categories and prohibited categories.

The New Catalogue mainly focuses on encouraging foreign investment in high-tech manufacturing through the application of innovative technology, materials and craftwork. This article discusses the main changes of the New Catalogue compared to the previous version which reflect the future development and national support policy of the Chinese economy.

Encouraged Category.
The New Catalogue adds several items to the encouraged category. These items are mainly related to innovative technology, materials and craftwork, and energy conservation and environmental protection.

These changes fall in line with the State Council’s Several
Opinions on Making Good Use of Foreign Investment (“Several Opinions”), the State Council’s Decisions concerning the Promotion and Development of Stragetic New Industries (“Decisions”), and the State Council’s Guiding Opinions on Promoting the Development of High-tech Services Industries (“Guiding Opinions”).

The majority of the items added to the encouraged category belong to the strategic innovative industries defined in the Decisions and most items are added in the fields of energy conservation and environmental protection. The added items in the encouraged category include:

  1. 1. high-tech manufacture, such as the manufacture of functional, environmentally friendly and special clothes, synthetic use of leather waste, and the development and fabrication of innovative functional glass;
  2. 2. energy conservation and environmental protection, such as the manufacture of air pollution treatment equipment, rural small-scale polluted water treatment equipment, equipment for solid waste treatment manufacture
    of key components of innovative energy vehicles, recycling and treatment of disused electric and electronic products, vehicles and batteries, construction
    and operation of power stations running on recycled water, and construction of motor vehicles charging stations;
  3. 3. high-tech services, including startup investment enterprises, intellectual property rights services, household services and occupational skills education; and
  4. 4. production of natural food additives and food ingredients.

According to the previous edition of the Catalogue, foreign investors engaging in the production of food additives and ingredients were required to involve a Chinese partner. The New Catalogue abolishes this requirement and allows foreign investors solely to engage in the production of food additives and ingredients.

Restricted Category
Several items have been removed from the restricted category while limited items have been added. The following items have been removed from the restricted category:

1. manufacture of carbonated soft drinks;
2. manufacture of disposable self-destruction syringes, infusion apparatus, transfusion apparatus and production of blood bags;
3 container manufacture;
4. franchising, contract operation, business management;
5. wholesales, retail sales and distribution of medicine;
6. financial leasing;
7. distribution of audiovisual products except movies (requirement for a Chinese partner’s controlling power has been removed); and
8. operating medical institutions (the requirement for a Chinese partner’s involvement has been removed).

There are noteworthy changes regarding the health care industry. The New Catalogue removes the foreign investment in operating medical institutions from the restricted category. This change follows previous regulations on the health care sector.

In 2010, the NDRC and the Ministry of Health (“MOH”) jointly promulgated the Opinions on Further Encouraging and Guiding Social Capital into Operating Medical Institutions (“OMI”) and expressly indicated that pilot projects are allowed for qualified foreign investments to set up medical institutions in China and this area will be opened up stage by stage. Afterwards, the MOH and the MOFCOM jointly promulgated another regulation on 22 December 2010 that allows medical institutions from Hong Kong and Macao to establish wholly foreign-owned hospitals in five pilot provinces including Shanghai, Chongqing, Guangdong, Fujian and Hainan. At the beginning of 2011, the MOH released its authority to approve the setting up of Sino-foreign cooperative medical institutions to its provincial branches and reserves the authority to approve wholly foreign owned medical institutions.

In combination, the 2010, 2011 regulations and the New Catalogue provide opportunities for foreign investors to invest in or operate medical institutions in China. We deem the Chinese health industry to have significant potential in the coming years.

Prohibited Category
There has been limited amendment to the prohibited category. The New Catalogue allows foreign investors to provide music content via the internet which was prohibited according to the previous edition of the industrial guidance catalogue. Three new items are included as prohibited for foreign investment, which are:

i) research and development of rare and peculiar precious and fine varieties (including planting, stock raising and aquatic products);
ii) domestic express services;
iii) construction and operation of villas.

Priority of certain treaties / arrangements
In addition, the New Catalogue added the priority provisions as follows: the arrangements and treaties on the close economic and trade relationship between China and Hong Kong, Macao and Taiwan as well as certain Free Trade Zone Agreements and particular regulations of the State Council will prevail over the New Catalogue.

The New Catalogue reflects Beijing’s intention to further promote foreign investment in the fields of advanced technologies, high value-adding manufacturing, energy conservation and environmental protection. The New Catalogue also keeps pace with the recent regulations on government support policy in relation to certain industries during the 12th five-year plan period.

More detailed implementation rules in particular industries will be promulgated further for the New Catalogue. To accurately grasp the regulatory development on industrial guidance and government policy in relation to certain industries can greatly benefit foreign investors.

HIL has long standing experience in advising foreign investors in becoming acquainted with the latest and local regulatory environment and obtain available policy support. We would be delighted to assess your envisaged investment blueprint and provide you with accurate and practical advice on the now prevailing regulatory and policy environment and obtain available
support from the governmental authorities at the state or city level.

Lynn Zhang