A New Foreign Investment Regime
Lauffs, Andreas, Tan, Andrew, The China Business Review
China's new foreign investment rules open more sectors to outside competition
China's recent revisions to its regulatory regime governing foreign investment broaden the scope of foreign investment opportunities and ease approval requirements for a number of industries, particularly those in manufacturing. The new regime, brought about largely as a result of the country's December 2001 World Trade Organization (WTO) entry and national plans for economic development, is less transparent than the previous one and certain aspects of it may contradict China's WTO commitments regarding export subsidies and trade in services.
The Regulations Guiding the Direction of Foreign Investment (Guiding Regulations) and the Catalogue Guiding Foreign Investment in Industry (Catalogue) outline which foreign investment projects can be approved by local or central authorities, which projects enjoy preferential tax treatment, and which projects are off-limits to foreign investment. The State Development Planning Commission (SDPC), State Economic and Trade Commission (SETC), and Ministry of Foreign Trade and Economic Cooperation (MOFTEC) enacted the Guiding Regulations and Catalogue on April 1, 2002, replacing previous versions issued in 1995 and 1997, respectively.
The Guiding Regulations and Catalogue maintain the longstanding categorization of industry projects as "encouraged," "restricted," and "prohibited," with any unlisted industry falling into the "permitted" category. Unlike the previous regime, the new rules no longer divide the category of restricted investment into two groups (A and B), which differ in approval requirements and available tax benefits. The Catalogue now includes an appendix that outlines the scheduled liberalization of ownership requirements in some industries, reflecting China's WTO commitments.
Project approval and exceptions
The primary distinction among the three non-prohibited categories of investment is the level of government authority required for project approval: central, provincial, and local (see Table). The relevant approval authority for a particular project suggested by the table merely presents a general rule. Exceptions to these approval requirements apply to certain service industries that are subject to China's WTO liberalization commitments.
The Catalogue is also subject to any other industry-specific laws or administrative regulations that may impose separate approval procedures or requirements. Based on current industry-specific regulations, foreign investments in, for example, distribution, financial services, and telecommunications, would require approval from the applicable central authority in charge of that industry, regardless of the size of the investment.
Changes to the encouraged category
The number of industries in the encouraged category has increased from 186 to 262. Notable additions include the integrated circuit design sector, software development and production, certain computer system and peripheral production, automobile manufacturing, and wholesale and retail sales of ordinary goods (by implication, all goods except those specifically listed in the wholesale and retail section of the Catalogue and its appendix). All of these industries were originally in either the restricted B or permitted categories.
In addition, the new Guiding Regulations provide that any foreign investment project listed in the Catalogue Guiding Foreign Investment in the Dominant Industries of the Central and Western Regions, issued by SDPC, SETC, and MOFTEC, is considered encouraged and would enjoy the relevant privileges. The central and western regions also encourage projects, such as cotton weaving and the development, construction, and operation of scenic spots and related facilities, that fall within the restricted or permitted categories in the coastal regions.
Only encouraged …
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Publication information: Article title: A New Foreign Investment Regime. Contributors: Lauffs, Andreas - Author, Tan, Andrew - Author. Magazine title: The China Business Review. Volume: 29. Issue: 4 Publication date: July/August 2002. Page number: 22+. © U.S.-China Business Council Mar/Apr 2009. Provided by ProQuest LLC. All Rights Reserved.
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