Attention, Investors: Here Come China’s Sweeping Changes in FDI Rules

On November 4, the Chinese government released the latest update to the “Catalogue for the Guidance of Foreign Investment Industries,” outlining which industries shall be encouraged, restricted or prohibited for foreign investment.

A draft of the revised list has been released for public commentary and will be officially implemented on 3 December.

The 2014 Guidelines are set to lift restrictions on foreign investments across a wide array of sectors, with the number of restricted items more than halved, from 79 to 35

Opening Up to Foreigners

Inclusion on the list of encouraged industries is often coupled with the easing of restrictions on foreign investment, such as the ability to operate as a wholly foreign-owned enterprise (WFOE) rather than being restricted to a Sino-foreign joint venture (JV).

The revised Catalogue now permits WFOEs in the following industries:

  • Traditional Chinese medicine
  • Oil field exploration and development
  • Automobile parts
  • Aircraft engines and components
  • Vessel engines and components
  • Equipment manufacturing for air traffic control systems
  • Accounting and auditing
  • Meanwhile, foreign investors will soon be allowed to act as the controlling shareholder in JVs engaged in the following industries:
  • Manufacturing of ground-based and water-based aircraft
  • Design and manufacture of vessel cabin machinery
  • Design and manufacture of civil satellites
  • Construction, maintenance and operation of railways
  • International sea transportation
  • Operation of performance venues

Mining and Manufacturing

Overall, the 2014 Guidelines are set to lift restrictions on foreign investments across a wide array of sectors, with the number of restricted items more than halved, from 79 to 35.

Here we provide a summary of the major changes compared to the 2012 Guidelines.

For starters, most restrictions on the mining industry shall be lifted, with only the mining of special and rare types of coal, lithium, granite and precious metals being restricted to investment with a Chinese controlling partner.

The previous prohibition on foreign investment in the rolling and smelting of non-ferrous metals will be removed as well.

Nearly all restrictions on manufacturing are to be withdrawn, the only major exceptions being the processing of edible oils and fats, production of biological fuels (e.g. ethanol), smelting of rare metals and rare earth elements, and the manufacture and repair of vessels.

Prior to these changes, foreign investment in the production of numerous types of batteries was forbidden, as was any investment into traditional Chinese tea – both of which will now be open to investment.

Finance and Real Estate

Investment in the finance industry is also to be considerably liberalized. There will no longer be limitations on foreign investment in finance companies, trust companies, currency brokerages and insurance brokerages.

Foreign investment in banks would now be allowed, provided that no single financial institution or entity controlled by such an institution may control over 20% ownership of a Chinese commercial bank.

Furthermore, foreign financial institutions combined may not own more than 25% of the shares of any bank. Lastly, only foreign banks (rather than other types of foreign companies) may invest in rural commercial banks.

Restrictions on investing in securities companies are to be eased. Foreign investors will now be allowed to invest in securities companies underwriting and sponsoring RMB-denominated ordinary shares, foreign shares, government bonds, corporate bonds, as well as brokering foreign shares, government bonds and corporate bonds.

The limit of shares a foreign entity may own in such a company has also been raised from one-third to 49%.

The real estate sector is now set to fully open to foreign investment, with previous restrictions like those on land development and the construction of offices, high-end hotels and real estate brokerages to be fully lifted.

Also lifted are limitations on building and operating movie theaters, theme parks, recreation venues and power grids.

New Constraints

However, several new constraints have been added. One that stands out is a new restriction on the manufacture of motor vehicles. In any JV producing vehicles, the Chinese party must now own over 50% of shares.

Furthermore, such companies may only engage in up to two of the following three sectors: passenger vehicles, work-related commercial use vehicles (such as trucks or vehicles used in construction), and motorcycles.

The latter restriction shall not apply where the third category is added via a merger or acquisition undertaken by the Chinese party.

Limitations shall also be extended to health care and education. Hospitals must now have a Chinese party as the majority shareholder. The same applies to pre-school and tertiary education.

The 2014 Guidelines also introduce several new prohibitions on foreign investment. These extend to:

  • production of genetically modified plant seeds
  • processing of petroleum and coking
  • processing and production of nuclear fuel
  • sale of tobacco

Chinese legal consulting (although restraints on non-Chinese legal consulting have been completely lifted)

operation of antique stores and auction houses selling Chinese cultural relics

Lastly, with this document the Chinese government intends to tighten control on viewing flights over China and aerial photography, and several activities related to geographical surveying and mapping.

About the Author

Dezan Shira & Associates, a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in China Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com

Photo credit: Shutterstock

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