China introduces new regulations to encourage foreign investment

China is bucking the trend of global economic protectionism by taking major steps in 2017 to further liberalize its foreign investment regime.

In a global economy in which protectionist tides are rising, China is bucking the trend by taking major steps in 2017 to further liberalize its foreign investment regime. These reforms are driven by a number of factors. First, they are intended to support China's long-term strategic shift towards services and high-end manufacturing (the so-called “Made in China 2025 Strategy”) to drive economic growth. Second, increasing inbound investment will attenuate China’s imbalanced investment flows and thereby help alleviate the RMB’s depreciation. Third, these reforms will help quell growing resentment in Europe and the United States about lack of investment access to China’s most lucrative sectors.

In this article, we explore two of the latest developments in China’s shift towards a more open economy. Specifically, we examine the Notice on Foreign Investment Measures for the Implementation of the 2016 Catalogue of Investment Projects with Government Approval issued by the National Development and Reform Commission on 14 January 2017 (NDRC Notice No. 111) and the Notice on Certain Measures for the Use of Foreign Investment in Opening Up to the Outside World issued by the State Council on 12 January 2017 (State Council Notice No. 5).  

NDRC Notice No. 111

NDRC Notice No. 111 is the latest development in China’s transition from a foreign investment approval regime to record filing and a negative list (Filing System).  Essentially, NDRC Notice No. 111 is a direction from the National Development and Reform Commission (NDRC) for local governments on the implementation of the Filing System.

By way of background, under the previous system, the Catalogue for the Guidance of Foreign Investment Industries (2015) categorized foreign investments in different sectors as prohibited, restricted, or encouraged, with those not expressly listed considered permitted. With the exception of prohibited sectors, in which no foreign investment was allowed, all investments were subject to the prior approval of the NDRC and the Ministry of Commerce (MOFCOM) or their respective local offices. Approval was also required for many changes to an investment, such as an increase in registered capital. 

The new Filing System, by contrast, is based on the idea that all foreign investments, except those on a “negative list,” are subject only to a record filing procedure after the investment has been made. Although the NDRC and MOFCOM will review each filing to ensure the investment falls outside the negative list, there is no need to apply for approval in advance. The negative list consists of three categories of investment: encouraged industries that are subject to restrictions on foreign equity holdings; restricted industries; and prohibited industries. Investments in prohibited industries remain prohibited outright, and investments in restricted industries and encouraged industries subject to restrictions on foreign equity holdings remain subject to MOFCOM approval. 

NDRC Notice No. 111 clarifies that investments subject to the approval process fall into two categories: 

  1. Investments of USD 300 million or more, which shall require the approval of MOFCOM (the State Council must also be notified of investments of USD 2 billion or more), and
  2. Investments of less than USD 300 million, which shall require the approval of MOFCOM’s local offices.

NDRC Notice No. 111 further clarifies that for any investment not on the negative list, foreign investment record filing will be handled by MOFCOM’s local offices irrespective of the value of the investment. However, it is important to note that the Catalogue of Investment Projects Requiring Government Approval also stipulates that foreign investments that are not on the negative list but which involve certain key sectors (eg, energy, transportation, and agriculture) may still be subject to additional filing or approval requirements to ensure they comply with state development and industrial policy.  

The transition to a Filing System is a major move towards liberalization. However, the negative list, which was first implemented on a trial basis in China’s Free Trade Zones and subsequently implemented national-wide, still covers many industries that are attractive to foreign investors, including telecommunications and certain financial services. As well, there are areas, in which foreign investment, though allowed, is limited to a minority equity stake. 

As discussed below, State Council Notice No. 5 further initiates the removal or relaxation of some of these restrictions.

State Council Notice No. 5

State Council Notice No. 5 is a general direction from the State Council for ministries of the central government and for local governments to take steps to liberalize foreign investment. 

At a press conference on 30 December 2016, a vice minister of the NDRC announced that China would liberalize foreign investment in a number of sectors in 2017. The timing of this announcement coincided with the one month period for public comment on the new Draft Catalogue for the Guidance of Foreign Investment Industries (Draft Catalogue) that was jointly released by NDRC and MOFCOM on 7 December 2016. The State Council took an important legislative step towards liberalization when it promulgated State Council Notice No. 5.

1. Increased openness to foreign investment 

Under the rubric of increasing openness to foreign investment, State Council Notice No. 5 directs the liberalization of an array of industries. Notably, it directs the relaxation of restrictions on foreign investment in banking, securities and futures, fund management, insurance and insurance brokerage. It also requires a removal of restrictions on foreign investment in accountancy, construction design, and credit rating services.  These reforms, once implemented, could do much to placate foreign investors, who have long been frustrated by their lack of access to China’s service sector. For example, foreign investors in China's securities industry have been restricted to a 49% equity stake in Sino-foreign joint ventures. 

State Council Notice No. 5 also directs the liberalization of foreign investment in key industrial sectors, including manufacturing, infrastructure, transportation, mining and petroleum. With respect to manufacturing, particular emphasis will be placed on helping achieve the Made in China 2025 Strategy.  Indeed, foreign investment in high tech sectors is a major focus, and State Council Notice No. 5 directs greater support for R&D cooperation between foreign invested enterprises (FIEs) and domestic enterprises and stipulates that foreign invested R&D projects shall enjoy all preferential policies made available for domestic projects. State Council Notice No. 5 also directs increased efforts to retain high level technical talent by streamlining immigration procedures. 

Interestingly, State Council Notice No. 5 directs that there should be an “orderly” liberalization of protected sectors like telecommunications, culture, and education. This seems to be a call for a gradual opening up of these sectors.   

2. Increased fair economic competition

State Council Notice No. 5 also contains a number of directions to increase fair economic competition between FIEs and domestic enterprises. On a general level, State Council Notice No. 5 orders all local governments to enforce national-level foreign investment policies and forbids them from imposing any unauthorized restrictions on FIEs. Further, subject to certain exceptions, all government agencies shall process FIE license applications in accordance with the same standard and in the same time-frame as domestic enterprises. Other directives include: increasing FIE participation in standardization reform; allowing FIEs to bid for public tenders on an equal footing with domestic enterprises; improving protection for FIE intellectual property; allowing FIEs to list on China’s stock exchanges, trade on its OTC market and raise funds through domestic debt offerings; and eliminating the minimum registered capital requirement for FIEs and replacing it with a unified system of registered capital for both domestic enterprises and FIEs. 

3. Increased efforts to attract foreign investment

State Council Notice No. 5 directs that local governments will implement the central government’s policies to attract foreign investment and, within certain parameters set by law, are also allowed to introduce their own preferential policies to attract investment. 

Interestingly State Council Notice No. 5 calls for measures to increase foreign development in Central, Western and Northeastern China, which are currently underdeveloped. This coincides with the announcement of the opening of seven new free trade zones, all but one of which is located in one of these three underdeveloped regions.  Other measures include land use policies that apply equally to FIEs and domestic enterprises and improving foreign exchange management procedures.

Conclusion

State Council Notice No. 5 does not give a specific indication of the extent or time-frame for its liberalization directives. Many reforms will likely be gradual, as they are part of a long term effort to overhaul China’s foreign investment rules. Others, including many sector-specific reforms, are already reflected in the Draft Catalogue and should be implemented soon. 


This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document. Simmons & Simmons is registered in China as a foreign law firm. We are permitted by Chinese regulations to provide information on the impact of the Chinese legal environment and also to provide a range of other services. We are not admitted to practise in China and cannot, and do not purport to, provide Chinese legal services. We are, however, able to co-ordinate with local counsel to issue a formal legal opinion should this be required.