China’s gradual opening up to foreign investment has been a key factor in the successful development of China’s economy. However, some industrial sectors remain closed to foreign investment. With the economy maturing and growth slowing (to around 7% in 2015), the further opening of various industrial sectors to foreign investment is a clear sign of the government’s intention to continue liberalizing the economy and pursuing far-reaching structural economic reforms.
2015 Foreign Investment Guidance Catalogue
China restricts foreign investment through the Foreign Investment Guidance Catalogue, which dictates in which sectors foreign investment is encouraged, restricted (i.e. subject to some limitations) and prohibited. Foreign investment is permitted in all sectors not listed in the catalogue.
In November 2014 a revised draft of the Foreign Investment Guidance Catalogue (last published in 2011) was issued, and a final version was adopted in March 2015. The 2015 Foreign Investment Guidance Catalogue that became effective on 10 April 2015 has more than halved the number of restricted industry sectors from 79 to 38, while the number of prohibited sectors has been reduced from 38 to 36.
Sectors added to the encouraged category including:
- accounting and auditing (previous limited to cooperation or partnership, the only restriction is that the chief partner must hold the Chinese nationality);
- senior care institutions (a sector that is receiving a lot of encouragement from the Chinese government generally; for example, the MOFCOM and the Ministry of Civil Affairs recently issued a circular to encourage foreign investment in such institutions).
Sectors that have been removed from the restricted category
- various manufacturing sectors, including manufacturing of medicines, certain chemicals (e.g. calcined-soda) and general apparatus (e.g. various types of P0-grade bearings and their components)
- e-commerce for technology, media and telecommunication business (TMT)
- development of tracts of land, construction and operation of high-class hotels, high-class office buildings and international exhibition centers, investment in real estate secondary market and real estate brokerage
- trust companies, and currency brokerage companies (restrictions on foreign-invested banks remain).
Some sectors have also been added to the restricted category. Foreign investment in hospitals for example has been moved from the permitted to the restricted category, and is now subject to co-investment with Chinese investors (i.e. joint ventures with Chinese parties only); while the manufacture of complete automobiles has also been moved to the restricted category (signifying the government’s intention to support local car manufacturers).
The prohibited category has remained largely untouched. This means, for example, that the establishment of foreign law firms hiring Chinese-licensed attorneys and practicing Chinese law remains strictly prohibited (despite relaxation of the rules in the Shanghai Free Trade Zone last year).
Liberalizing the Chinese Economy
Some industries are receiving specific protection – a message that the Chinese government will not hesitate to use its powers to give local industries the chance to develop independently, if this is regarded in the interest of China’s economic development.
More generally though, the 2015 Foreign Investment Guidance Catalogue brings opportunities for a lot of different sectors. For foreign investors that are operating in “hot” sectors such as senior-care and e-commerce this is official confirmation that their investments are welcome. The lifting of some of the rules for foreign-investment in accounting and auditing, trust work and currency brokerage may encourage foreign investors to further expand in China and contribute their much-needed expertise. And by removing investment in high-class hotels, office buildings and international exhibition centers, the Chinese government may be hoping to give these sectors a further boost.