China’s New Foreign Investment Rules

China non-compete

China’s State Council recently issued the Opinion on Taking Additional Steps in the Work Improving the Utilization of Foreign Investment [in Chinese only]. This Opinion and various research reports issued together with it confirm China will not be changing the basic approach to foreign investment it has followed since 2006.

The idea behind this new Opinion is to refine and expand, rather than to make any radical changes. As with most such documents, the text is long on general policy pronouncements and short on concrete details. For those of us who work on China FDI matters on the ground, here are the important matters from this Opinion:

1. Continuing to promote “quality over quantity” in foreign investment.
The Opinion repeats the basic policy of “quality rather than quantity” first promulgated in 2006. In keeping with this policy, the following five investment areas will be encouraged: high-end manufacturing industry, high-tech industry, modern service industry, new energy industry and energy-efficient and environmentally clean industries. On the other end, high pollution, high energy usage and raw materials intensive industries will be discouraged. Low tech, low value added industries and industries already in overcapacity will also be discouraged.

For the most part, detail on how favored industries will be encouraged is lacking. The Opinion does state, however, that foreign investments in the encouraged category will have preferred access to acquisition of land and will be permitted to pay 70% of the minimum price for land rights.

2. Promoting foreign investment in the Central and Western regions.
China has developed an interesting strategy for developing its Central and Western regions. Early on, development in the coastal regions was promoted through a combination of tax breaks and support for low tech, labor intensive, light manufacturing industries. Tax breaks have been pretty much eliminated in the coastal regions and the “official” policy is that low tech manufacturing is to be discouraged. However, the policies are now available to encourage investment in the Central and Western regions. Tax breaks are available and low tech manufacturing is now formally encouraged for this region. The notion apparently is that what worked for the coastal regions should also work in the Center and the West.

3. Changes in the administration of foreign investment.
A major trend that began in 2006 was an attempt to centralize the approval process for foreign investment. The Opinion marks a turn away from that trend, as it grants much greater scope for local approval of foreign invested projects. Under the old rules, all projects with an investment amount over $100 million were required to be approved in Beijing.

Under the Opinion, this number has been raised to $300 million. In addition, the Opinion provides that the applicable ministries in Beijing have the right to grant approval rights to local governments in most areas under their jurisdiction. Since approval in Beijing has always been a major impediment to speedy review and approval of investment projects, this change should have an immediate positive impact.

4. Creating an improved investment environment.
Under this heading, the Opinion proposes improving the foreign exchange system for foreign invested enterprises and allowing foreign investors to delay full capitalization in cases of financial difficulty. Foreign exchange hassles are a big headache for foreign invested enterprises and improvements in this area will be welcome. Unfortunately, the Opinion provides no concrete guidance on what actually will be done to improve the situation.

5. Expanding the scope of vehicles for foreign investment.
The most interesting feature of the Opinion is the proposal that the available vehicles for foreign investment be greatly expanded. The Opinion proposes to add the following new avenues for investment:

(a) Foreign participation in the reform and restructuring of domestic enterprises through equity participation and M&A will be encouraged.
(b) A-share listed companies in China will be encouraged to allow investment from both domestic and foreign strategic investors.
(c) The plan to allow foreign investment for credit guarantee companies will continue.
(d) The creation of venture capital companies using foreign investment will be encouraged.
(e) Exit mechanisms for private equity investment funds will be improved.
(f) Qualified foreign-invested enterprises will be encouraged to list on the domestic A-share market and issue corporate bonds and medium-term notes.

The State Council explains these proposals as part of a general recognition that the PRC has come to accept the utility of the securities and private investment markets in developing enterprises, especially in the advanced areas China seeks to encourage. All these proposals would result in huge changes in the current rather unsophisticated and underdeveloped investment environment. However, implementation will require major changes in the Chinese system and there has so far been no legislative or regulatory changes that would implement any of these dramatic new proposals.

3 responses to “China’s New Foreign Investment Rules”

  1. These changes, if they would be applied, would greatly impact the current Chinese economic, social, and political structure.
    On its face, all five points seem to be positive changes for China and significant opportunities for foreign investment as well as other foreign firms to access the Chinese market, that has been closely guarded and regulated.
    However, I am, at this moment, skeptical about (3) and (5).
    (3) implies a likely shift in geopolitical influence away from the central government in Beijing. Given the central government’s track record, the shift might ruffle a few feathers.
    As for (5), given that there isn’t a concrete policy established, and given that Chinese companies, manufacturers, and firms are still familiarizing with foreign norms of business, there will likely spring forth many litigation opportunities.

  2. Always follow the trends in China rather than fight against them. Do what the government wants and you will thrive. Do what the government doesn’t want and you will probably be cut down.

Leave a Reply

Your email address will not be published. Required fields are marked *