Revisions encourage high-end and energy-saving ‘green’ investment

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Revisions encourage high-end and energy-saving 'green' investment | China Business Law Journal
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The 2011 Revision of the Catalogue for Guiding Foreign Investment in Industry (New Catalogue) was promulgated by the State Council on 24 December 2011 and took effect on 30 January 2012. The New Catalogue replaces the previous version in effect since December 2007 (2007 Catalogue).

The New Catalogue encourages foreign investment in 354 industries (a slight increase from the 2007 Catalogue), restricts foreign investment in 78 industries (fewer than previous) and prohibits it in 38 industries (about the same). Foreign shareholding restrictions have been removed in about 10 industries.

The New Catalogue seeks to encourage foreign investment in high-end manufacturing, high and new technologies, modern services and new energy, energy-saving and environmentally friendly industries. This higher-value-added and greener focus is in line with the April 2010 State Council Opinion on Further Improving Utilisation of Foreign Investment (2010 State Council Opinion) and the priorities in China’s 12th Five-Year Plan.

Like the 2007 and earlier Catalogues, the New Catalogue lists specific industries where foreign investment is encouraged, restricted or prohibited.

For industries not listed, foreign investment is permitted. Under the current foreign investment regime, local government authorities can approve foreign investment in encouraged and permitted industries with a total investment of less than US$300 million, and in restricted industries with a total investment of less than US$50 million. Foreign investment in encouraged industries may also receive preferential tax treatment.

Treaties prevail

The 2007 Catalogue and earlier Catalogues did not specify what happened if the Catalogue’s provisions differed from those in international treaties, arrangements with regions of China (Hong Kong, Macau and Taiwan) or other State Council special regulations or industrial policies (e.g. the Catalogue for Guiding the Adjustment of the Industry Structure issued by the National Development and Reform Commission).

The New Catalogue says that in such cases the treaties, arrangements, and other regulations and policies prevail.

Changes to ‘encouraged’ category

  • Mining: exploration and development of unconventional natural gases like shale gas and submarine gas hydrates (limited to equity and co-operative joint ventures) has been added.
  • Food producing and processing: production of natural food additives and ingredients is no longer subject to foreign shareholding restrictions. Storage of vegetables, dried and fresh fruits, livestock or poultry products has been removed from the category.
  • Textile manufacturing: the scope is narrowed through a more detailed description of qualified projects with an energy-saving and environmentally friendly focus.
  • Leather product manufacturing: the use of recycled leather has been added.
  • Chemicals: several types of manufacturing have been removed including ethylene, basic organic, chemical and industrial raw materials, and mass coal chemical industrial products. More examples are used to better define the scope of certain encouraged industries, in particular the manufacture of engineering plastic and plastic alloys, and supporting raw materials for synthesised materials.
  • Pharmaceuticals: some projects (e.g. manufacturing of contraceptives, Bacillus Calmette-Guerin vaccine and poliomyelitis vaccine) were removed, with a focus on the development of new products.
  • Non-metal mineral manufacturing: new projects have been added with an emphasis on developing new technologies, energy-efficient products and environmentally friendly processes, e.g. the manufacture of conductive glass for thin-film battery and solar concentrator glass, the manufacture of glass fibre products and special glass fibre, recycling and use of construction waste, and comprehensive use of the industrial by-product gypsum.
  • General machinery manufacturing: new projects for the manufacture of high-precision, high-strength and complex equipment and components have been added.
  • Specialised equipment manufacturing: environmentally friendly projects have been added, e.g. the manufacture of air pollution control equipment and recycling of waste electrical products.
  • Automobile and equipment manufacturing: the manufacture of assembled automobiles has been removed, but the manufacture of key components for new-energy vehicles has been added, with detailed specifications of covered components.
  • Electrical machinery and apparatus manufacturing: equipment for nuclear power plants over one million kilowatts has been removed.
  • Communications and other electronic equipment manufacturing: digital camcorders, digital audio equipment and digital cinema production, editing and projection equipment have been removed. High-definition digital video cameras and audio equipment and touch systems (touch screens, touch components etc.) have been added.
  • Service industries: logistics information consulting services, intellectual property services, domestic services and the establishment of venture capital enterprises have been added.
  • Education: training projects for vocational skills have been added.

Changes to ‘restricted’ category

  • Pharmaceutical: distribution and retail of pharmaceuticals have been removed (now in the ‘permitted’ category), so the 2007 Catalogue requirement that the Chinese party hold a majority stake in a retail pharmaceutical company with over 30 pharmacies selling different products no longer applies.
  • Food producing and processing: the manufacture of carbonated beverages has been removed. But the 2007 Catalogue requirement for the Chinese party to hold a controlling interest in projects for processing of edible soybean and rapeseed oil has been expanded to include processing of all edible oils including cottonseed, peanuts, tea seed, sunflower and palm oil.
  • Wholesale and retail: commercial companies engaged in franchising, entrusted operations and business management have been removed, and the distribution of audio and video products (limited to co-operative joint ventures) is no longer subject to the requirement that the Chinese party must hold a controlling interest. Construction and operation of large-scale wholesale markets for agricultural products have been added.
  • Financial services: financial leasing companies have been removed.
  • Real estate development: the construction and operation of villas have been moved to the ‘prohibited’ category, reflecting government efforts to cool the real estate market and control inflation.
  • Education: ordinary upper secondary educational institutions (high schools) are more tightly restricted, with only co-operative joint ventures allowed (not equity joint ventures).
  • Hygiene and social security: medical institutions have been removed from the ‘restricted’ category and are now permitted. This is consistent with a November 2010 State Council circular, which permits eligible foreign investors to establish wholly foreign-owned medical institutions on a pilot basis and gradually removes equity restrictions.

Changes to ‘prohibited’ category

  • Postal services: domestic courier services for letters are added, in line with the 2009 PRC Postal Law, which allows only China Post (also the industry regulator and pricing authority) to deliver letters posted within China.
  • Media: the 2007 Catalogue prohibited foreign investment in news websites, network audio and video programme services, internet access service venues and internet cultural operations. The New Catalogue specifies that music is excluded from that prohibition.

Catalogue revisions

In accordance with the 2010 State Council Opinion, the Catalogue for Guiding Foreign Investment in the Dominant Industries of the Central and Western Regions will be supplemented and revised (with reference to the New Catalogue), and is expected to encourage foreign investors to develop labour-intensive projects that meet environmental protection requirements in the Central and Western regions.

Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mail at danian.zhang@bakermckenzie.com

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