By Jerry Liu / Jessica Foo
China has been experiencing a sharper-than-expected slowdown of its economy and a heightened anxiety about the Yuan as a result of speculation of capital outflows. To address these issues, China hopes, among other measures, to use foreign investment and know-how to enhance its capital base, foster innovation, and develop the skills of its labor force. In furtherance of these aims, the State Council issued the Notice of the Several Measures on Expanding Open-door Policy and Making Active Use of Foreign Investment (“Notice”, Guo Fa [2017] No. 5) on 12 January 2017.
The Notice sets out 20 specific measures divided among three main themes, opening up to foreign investment, creating a fairer competitive environment and attracting foreign investment, and designates the relevant governmental departments in charge of implementing the measures.
We summarize below those measures which are most relevant to foreign investors and provide our brief discussions.
A. Sectors to be (further) opened up to foreign investment
Measures
The restrictions on market access by foreign investment in such sectors as services, manufacturing, and mining are to be lifted through the amendment of the Catalogue of Industries for Guiding Foreign Investment (“Catalogue”) and other policies and regulations. In particular, foreign investment restrictions in service industries including banking, futures, insurance, and securities will be lifted, together with the accounting and auditing, architecture and design, and credit ratings sectors. Restrictions on the telecommunications, Internet service, culture, education and transportation industries will be lifted in due course.
For the manufacturing industry, restrictions will be removed on railway transportation equipment, motor vehicles, ethanol fuel, and oil and fat processing and support will be given to foreign investments in high-end, intelligent, and green manufacturing.
Foreign investors are encouraged to establish research and development centers in China and partner with Chinese companies as well as technology and innovation institutions. To this end, the government has offered favorable visa policies for skilled foreign nationals and their family members; in particular, those that work in the science and technology fields.
Brief Discussion
The National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) appear to have been ahead of the Notice and in fact issued a draft revised Catalogue on 7 December 2016 to reflect a majority of the aforementioned liberalizations. They include the reduction of the total number of foreign investment restrictions from 93 to 62 which saw the removal of credit rating and processing of oils and fat from the restricted category and deletion of the Chinese nationality requirement for the managing partner of accounting and auditing firms. However, banking, insurance, and securities remain in the restricted category, with foreign investment in securities joint ventures limited to a minority equity interest. Additionally, the negative list remains lengthy and drafted very broadly.
It is also interesting to note that the Notice, like the draft revised Catalogue, has completely left out the information industry sector, an industry foreign investors have long-hoped to see restrictions relaxed, while opening up foreign investment in railway transportation equipment and motor vehicles where domestic competitors are well-established and are already dominating the Chinese market.
Thus, the extent to which the Notice will effectively reduce restrictions on foreign investment barriers remains unclear.
B. Maintaining fair competition between foreign-invested and domestic companies
Measures
The Notice attempts to protect and promote the uniform treatment of foreign and domestic companies by requiring the authorities to apply the same standards and deadlines when approving licenses or qualification applications from foreign and the domestic companies; rigorously protect foreign-invested companies’ intellectual property rights; unify the registered capital requirements for all enterprises; treat all products equally during government project procurement; improve transparency with respect to the formulation of industry standards; and broaden channels in which foreign-invested company may raise funds.
Brief Discussion
The 2017 business climate survey report published by the American Chamber of Commerce in China and Bain & Company ranked inconsistent interpretation and enforcement of regulations and unclear laws as their biggest challenge and one of the top driving forces for moving their investments out of China. Although the survey participants appreciated the fact that some regulatory challenges affected domestic and foreign companies, more than half of the respondents felt unfairly treated by the long-running inconsistencies in policy enforcement between foreign and domestic firms — this sentiment was particularly strong among respondents from Technology and Other R&D-intensive (60%) and industrial and resources (63%) industries. When asked what policy changes would encourage increased investment levels in China, greater fairness, transparency, and predictability in regulatory enforcement was selected as having the greatest impact.
Consequently, the measures are likely to be warmly welcomed by foreign investors and, if fully implemented to the spirit of the Notice, are likely to be very helpful in retaining foreign investments and propelling China back to the top investment destination.
C. Stimulating policies to attract more foreign investment
Measures
The Notice calls for local governments to formulate their own policies to stimulate foreign investment; encourages foreign investors to transfer investments to China's central, northeastern, and western regions (“CNW Regions”) by granting preferential tax, land, and financing treatment; confirms continuation of preferential land-use policies for “encouraged” foreign investments and the improvement of foreign currency exchange policies; and necessitates the improvement and simplification of foreign direct investment policies.
Brief Discussion
In line with the Notice’s aim to transfer investments to the CNW Regions, the NDRC and MOFCOM published the 2017 revised Catalogue of Priority Industries for Foreign Investments in the Central and Western Region (“2017 CWR Catalogue”) which is to come into effect and replace the current 2013 catalogue on 20 March 2017. The 2017 CWR Catalogue covers the CNW Region and Hainan province and sets out 639 prioritized industrial items, among which, 173 are newly-added (including engineering reconnaissance and design, graphic design, and logistics). However, given that the central, northeastern, and western regions have never been popular destinations, even with domestic companies, it may take more than just preferential policies to boost investments in those areas.
Although most of the measures are directional, the message is clear: it will be more convenient for foreign investors to invest in China in the future. We expect that clarifications and guidance will be formulated by the relevant governmental departments and we will continue to monitor and provide updates.
