China’s New Foreign Investment Catalog

At the end of December, the NDRC issued its long awaited 2011 revision to the Catalog for Guidance for Foreign Investment 外商投资产业指导目录(2011年修订). It is a central policy of the Chinese government that foreign investment must be made in a manner that is consistent with Chinese policy and in a way that will promote China’s development. China therefore follows a policy of guided investment, and the Catalog is the guide.

The first Catalog was issued in 1995. This is the fifth revision, replacing the 2007 Catalog. This 2011 version of the Catalog will take effect on January 30, 2012. Foreign invested enterprises approved prior to the effective date will not be effected. However, any changes to existing foreign invested projects that take effect after the effective date must comply with the terms of the new Catalog.

The encouraged category shows where the Chinese government wants foreign investment to go. The restricted and prohibited categories show the sectors that are hands off in China. Even for those who are not considering investment in China, the Catalog is instructive. The encouraged category is quite detailed. For those who are looking for the next sector where China will push for dominance, the Catalog is quite revealing. In the same way, the Catalog can show which sectors the Chinese government has decided to limit or reduce. The Catalog is therefore a model for the development of Chinese industry for the next several years.

In what follows, I will summarize and comment on the official NDRC explanation of the background and policy behind the new Catalog, which can be found here. In a subsequent post, we will provide more detail on the changes introduced in the Catalog.

Foreign Direct Investment (FDI) remains an important element of the Chinese economy. In 2009 and 2010, China remained the number two destination in the world for FDI. Through the end of November, 2011, FDI amounted to $US103.8 billion, an increase of 13.2% over the previous period. It is anticipated that the total for 2011 will be around $US110-120 billion. Even in the face of the world economic crisis, China clearly remains a primary target for foreign investors.

Starting with the 2007 Catalog, China has moved to substantially change the structure of foreign investment in China. The 2011 Catalog follows on this basic program. For the developed Eastern regions of China, the goal of the Catalog is to move foreign investment away from 1) investment in low value added, high labor business, 2) investment in conventional technology, and 3) investment in high pollution and resource intensive technologies. The Catalog is intended to push investment in the East towards high value added and technically advanced manufacturing, strategic technology in both manufacturing and services and low pollution energy saving technologies. The entire Catalog reflects these goals.

As stated by the NDRC, the new Catalog is intended to reflect the following changes:

1. Continued openness.
The continues the trend towards opening up of the economy, consistent with China’s WTO commitments and the need to make us of advanced foreign technology.  The basic numbers reflect this. Three items were added to the encouraged category, while seven items were removed from the restricted category and one item was removed from the prohibited category. In addition, where joint ventures are required, the required Chinese share was reduced in eleven cases and was not increased in any case.

2. Modernization and technical advance in the manufacturing sector.
Consistent with the 12th Five Year Plan, the Catalog focuses heavily on promotion of the traditional manufacturing sector. In particular, advanced technology in textiles, chemicals and equipment have been added to the encouraged category. The deletions from the encouraged category reflect the government’s desire to prevent excessive investment in conventional manufacturing technology, particularly where there is extensive current investment by foreign enterprises. This goal is reflected by the deletion of vehicle manufacturing from the encouraged category. The government also intends to prevent excessive investment in certain “trendy” sectors. This goal is reflected by deletion of mono crystalline silicon and chemical processing of coal from the encouraged category.

3. Promotion of strategic new industries.
A central goal of the 12th Five Year Plan is to move China beyond reliance on traditional manufacturing and onto strategic new industries that will mark the manufacturing world of the next several decades. The following seven such strategic industries have been identified:

— Alternative fuel cars:hybrid cars and electric cars as well as better fuel-cell batteries;
— Biotechnology: bio-medicines, new vaccines, and advanced medical equipment;
— Environmental and energy-saving technologies: energy efficiency, pollution control, clean coal, waste-matter recycling and seawater usage;
— Alternative energy: ext-generation nuclear power plants, solar power, wind power, smart grids and bioenergy;
— Advanced materials: rare earths, special-usage glass, high-performance steel, high-performance fibres and composites, engineering plastic, nano and superconducting materials;
— New-generation information technology: cloud computing technology, high-end software, virtual technology and new display systems; and
— High-end equipment manufacturing: Aircraft, high-speed rail, satellites and offshore oil/gas equipment.

4. Modern service industry. Service businesses that have a direct, practical value to the Chinese people or to China industry will be encouraged. Among the new entries in the encouraged category are:

— Electric car fueling stations
— Enterprise start-up consulting
— Intellectual property consulting
— Marine oil spill cleanup technology
— Vocational skill training

In addition, medical enterprises and financial leasing have been removed from the restricted category.

5. Adaptation to differences in regional development.
The basic approach of the Catalog is actually concentrated on the development of the already advanced coastal region. The goal of pushing China to high technology modernization conflicts with the extremely low state of development in the Western, Central and Northeast Regions, where the vast majority of the Chinese people actually live. For development in these regions, the government will need to take a different approach to FDI. For example, low value added, high labor content manufacturing that is strongly discouraged for the East may be permitted or even encouraged in the less advanced Western and Central regions. To date, however, no clear policy has emerged. These matters will therefore be addressed in the proposed revisions to the Catalog for Foreign Investment in the Western and Central Regions (2008) 中西部地区外商投资 优势产业目录, which are expected next year.

The intention of the Chinese government towards foreign investment is clear. Foreign investment is intended to support China’s manufacturing sector by providing access to modern advanced technology. There is no longer a focus on job creation and there is little interest in foreign investment in any sector of the economy outside those areas which will help China modernize. Potential foreign investors should take this into account. Investing against the trend in China seldom succeeds.