FDI Reform: China relaxes curbs on foreign investment

In the wake of healthcare reforms in May, which saw restrictions on foreign investment in joint-venture hospitals lowered, the Chi-nese government released the latest update to the “Catalogue for the Guidance of Foreign Investment Industries” on November 4, 2014, which further eased restrictions imposed on foreign in-vestments in certain key sectors such as batteries, rail freight, car parts, mining and chemicals.

Goals

While the reforms in May were mainly aimed at reducing the bur-den on public hospitals, the more recent ones try to alleviate the pressure on the government to remove restrictions on FDI as Chinese companies expand investments abroad, especially in Europe and the US. The goal is to induce foreign governments to reciprocate by either lowering existing restrictions in those mar-kets or refraining from introducing them. The new catalogue will come into effect on December 3.

The number of sectors in which foreign companies are required to form joint ventures (JV) or are limited to minority stakes will be reduced from formerly 79 to 35, thus – for the first time – allowing foreign companies to operate as a wholly foreign-owned enter-prise (WFOE) in sectors they were previously barred from or which necessitated a Chinese partner.

New sectors opened to WFOEs

 The sectors in which WFOE are now permitted include:

• Accounting and Auditing;
• Oil field exploration and development;
• Automobile parts;
• Traditional Chinese Medicine;
• Aircraft and vessel engines and components; and
• Equipment manufacturing for air traffic control systems.

Notably most restrictions in the manufacturing and mining sectors have been lifted, exceptions being the processing of edible oils and fats, the production of biological fuels, smelting of rare met-als and rare earth elements and the manufacture and repair of vessels. The mining of special and rare types of coal, lithium, granite and precious metals are limited to investments with a Chinese partner.

Restrictions on manufacturing and other sectors lifted

Other noteworthy changes have been made in the finance, secu-rities and real estate sectors. The catalogue now allows foreign investments in banks and has raised the limit of shares a foreign entity may own in a securities company from formerly one-third to 49 percent.

Sectors opened to majority stakes in JVs

While some sectors are now open to WFOEs others are still lim-ited to JVs. The latter, however, have also seen significant changes as foreign investors may now act as controlling share-holders in certain industries. These include:

• Manufacture of ground-based and water-based aircrafts;
• Design and manufacture of vessel cabin machinery;
• Design and manufacture of civil satellites;
• International sea transportation;
• Operation of performance venues; and
• Construction, maintenance and operation of railways.

The easing of the JV rules in the railway sector can be seen as an attempt to attract foreign investment as China plans to con-nect the underdeveloped western parts of the country to its exist-ing rail network.

New restrictions

The new catalogue does not only ease restrictions but also adds new ones to the list. JVs manufacturing vehicles may now only engage in up to two of the following three sectors, passenger ve-hicles, commercial use vehicles (trucks and construction) and motorcycles unless the third sector is added through a merger or acquisition by the Chinese partner. Furthermore the Chinese partner must now own more than 50 percent of the shares in such a company.
Foreign investments are prohibited in the production of genetical-ly modified plant seeds, processing of petroleum and coking, pro-cessing and production of nuclear fuel, sale of tobacco, Chinese legal consulting and the operation of antique stores and auction houses selling Chinese cultural relics.

Conclusion

By easing restrictions on foreign investments the Chinese government tries to mitigate any further decline of its annual growth rate and to appease foreign governments. While the reduction of entry barriers is laudable and an incremental development of the affected sectors, it remains to be seen if these goals will be achieved, considering that these sectors are either small and specialized or already dominated by highly competitive Chinese companies.