China Revises Foreign Investment Guidance Catalogue

Background of the Foreign Investment Guidance Catalogues

On December 24, 2011, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) promulgated the amended version of the Foreign Investment Industrial Guidance Catalogue (2011 Catalogue), revising the 2007 catalogue, effective January 30, 2012. This is the fifth revision to the catalogue, which was first issued in 1995. (Previous amendments were made in 1997, 2002, 2004, and 2007.) Foreign investment in the PRC has always had to undergo a government approval process; for example, Article 3 of the 1979 Joint Venture Law called for examination and approval of investments in joint ventures. According to CECC staff analysis, the 1995 catalogue was an improvement in transparency, in that it provided written, publicly available guidance as to what industries were open to foreign investment. Each version of the catalogue includes three separate categories, also called catalogues, with detailed lists of industries in which foreign investment is encouraged, restricted, or forbidden. Investment in industries not listed is permitted. The catalogue, as its name makes clear, directs foreign investment in China. It is, as an article published by Wilmer Hale in January 2012 notes, "an instrument of industrial policy." In the catalogue, descriptions of industries can be fairly general, such as the "development and manufacture of software products" (encouraged category, Section 3(21)(xii)) or specific, such as "40Gbps and above time division multiplexing equipment (TDM) . . ." (encouraged category, Section 3(21)(xxviii)).

The Role of the Catalogue in the Government Approval Process

Revision of the catalogue reflects changing Chinese government priorities for foreign investment. However, the revision does nothing to change the underlying approval process that is required for all foreign investment, or for significant changes to established (and hence already approved) foreign investment enterprises, in China. The approval process is an important tool by which the government ensures that any foreign investment in China conforms to the catalogue's classification of the relevant industry and, consequently, government policy. This approval is discretionary, and the approval process itself typically is not transparent, complicating foreign investment and providing the Chinese government opportunity to retaliate against foreign investors which have raised the ire of authorities for some reason. As a February 2012 article in the Wall Street Journal notes, "So when a U.S. company goes to China to compete with a Chinese company, it often finds itself competing instead with the state. And it is the state that has the handy advantage of approving or rejecting the foreigner's investment...." The article continues, "U.S. companies won't talk on the record about troubles in China because they fear retaliation." The US-China Business Council's 2011 China Business Environment Survey found licensing and approval barriers to be the second most serious issue its member companies face in China, noting the linkage between this issue and transparency and national treatment, which are core WTO principles. The approval process is governed by a series of rules, such as the 2009 Circular on Further Improving the Examination and Approval of Foreign Investment (English version, subscription required, and Chinese version), the 2010 Circular on Issues Relevant to Delegation of the Examination and Approval Authority to Lower Levels (English version, subscription required, and Chinese version), and the 2011 Circular on Issues in the Administration of Foreign Investment.

The 2011 Catalogue and the 12th Five-Year Plan

The catalogue is the culmination of a series of policy documents, and outlines those industries China's state planners believe would benefit from foreign investment, those which state planners believe should be reserved for Chinese companies or shut down entirely, and those in which foreign investment is allowed, but subject to certain qualifications. The Chinese government's formulation of economic and foreign investment policies evolves over a fairly long period of time. On April 6, 2010, the State Council issued Several Opinions on Further Improving the Work of Using Foreign Investment (in Chinese), calling for revision of the catalogue to encourage foreign investment in "high-end manufacturing, high and new technology, modern services, alternative energy, and energy conservation and environmental protection sectors." These sectors overlap with the so-called "strategic emerging industries," championed in the 2010 State Council Decision Concerning Speeding up the Fostering of Strategic Emerging Industries, and subsequently promoted in the 12th Five-Year Plan, passed in March 2011. The revisions contained in the 2011 Catalogue highlight current Chinese government priorities. According to Wilmer Hale's analysis, the 2011 Catalogue emphasizes three key areas: (1) transforming China's manufacturing from traditional to high-end, (2) supporting development of the strategic emerging industries, and (3) promoting a modern services sector. Several additions to the encouraged section of the 2011 Catalogue cover the strategic emerging industries, as highlighted in Chapter 10 of the 12th Five-Year Plan, namely energy conservation and environmental protection, next generation IT, biological industry, high-end equipment manufacturing, new energies, new materials, and new energy cars. Examples include production of energy saving, environmentally friendly building materials (Section 3(14)(i)) and certain pollution control equipment (Sections 3(18)(lvi–lvix)). New services sectors in the encouraged category of the 2011 Catalogue include, for example, venture capital services (Section 7(4)) and intellectual property services (Section 7(5)). Chapter 15 of the 12th Five-Year Plan calls for the development of the services trade, including financial services (Chapter 15, Section 1) and intellectual property protection services (Chapter 15, Section 3).

Conclusion

Overall, this revision of the catalogue tweaks the previous version. Like earlier versions, it is premised upon the important role of the Chinese government in directing economic development and ensuring that foreign investment furthers government goals. The revisions do nothing to change the investment structure or regime. Rather, the revisions merely reflect policymakers' decisions as to where foreign investment should be allowed to ensure that foreign investment serves to assist Chinese development as directed in the 12th Five-Year Plan, while ensuring government control over foreign investors and their investments.

For additional information on the regulation of foreign investment in China, see pages 177 to 178 of the Commission's 2011 Annual Report.