Member Article

The State Development and Reform Commission and the Ministry of Commerce recently revised two key catalogues regarding foreign investment. The Catalogue of Priority Industries for Foreign Investment in the Central and Western Regions (the “Regional Catalogue”) was revised on 23 July 2004. The revised Regional Catalogue replaces the 2000 version with effect from 1 September 2004. The Catalogue for Guiding Foreign Investment in Industries (the “Foreign Investment Catalogue“) was revised on 30 November 2004. The revised Foreign Investment Catalogue replaces the 2002 version with effect from 1 January 2005. Guiding regulations The revised catalogues are published under the 2002 Regulations for Guiding the Direction of Foreign Investment (the “Guiding Regulations”). The purpose of the Guiding Regulations is to direct foreign investment into certain priority industry sectors while restricting or prohibiting investment in other sectors. The Guiding Regulations achieve this purpose by classifying all foreign investment projects into one of four categories: encouraged projects, permitted projects, restricted projects and prohibited projects. The classification of an investment project under the Guiding Regulations in turn determines the feasibility and establishment method of the project as well as whether a project can enjoy certain tax benefits such as an exemption from VAT and customs duties on the import of capital equipment. The Guiding Regulations provide for the publication of two catalogues, the Foreign Investment Catalogue and the Regional Catalogue. The two catalogues constitute the basis for the applicable policies regarding the examination and approval of foreign investment projects and foreign investment enterprises. The Regional Catalogue The Regional Catalogue lists projects in which foreign investment is encouraged in 20 provinces, regions and cities in central and western China. The encouraged projects differ from place to place although there is generally an emphasis on infrastructure, agricultural and mining projects. An important addition to the encouraged projects in all locations is investment in the construction and operation of municipal gas supply, heating supply and water supply facilities and drainage pipe networks. In large and medium sized enterprises, the Chinese party is required to hold a controlling share in such projects. Another addition in all locations is passenger road transportation and the development, construction, protection and operation of tourist zones (spots) and their ancillary facilities. In a few areas, the manufacture of car parts has also been added to the list of encouraged projects. The Foreign Investment Catalogue The Foreign Investment Catalogue lists specific industries and economic activities in which foreign investment in China is encouraged, restricted or prohibited. Projects not included in the Foreign Investment Catalogue are considered permitted. The revised Foreign Investment Catalogue is further evidence that China is opening up more industries to foreign investment in line with its WTO obligations. However, the revised Foreign Investment Catalogue does not only contain positive news for investors. By removing certain projects from the encouraged category list, these projects are no longer eligible for tax breaks on capital equipment imports. Further, for a few projects, the Foreign Investment Catalogue now restricts foreign investment to joint ventures, which means that wholly foreign-owned investment in such projects is no longer permitted. Changes in the encouraged category Under the revised Foreign Investment Catalogue, wholly foreign-owned investment in the exploitation and dressing of low-grade and refractory gold mines in the Western region is no longer permitted. The production of solid pounded coke and dry-extinguished coke has been removed from the encouraged category. In the papermaking and paper products industries, the construction and operation of forest-wood pulp integration projects with raw materials forest bases have been removed from the encouraged category. The production of high-grade papers and paperboards (including newsprint) is now limited to joint ventures. In the steel-related industries, a number of projects are no longer encouraged. They include the production of wide steel plates, galvanised plates, corrosion-resistant aluminium-zinc alloy plates and clad plates and the processing of waste steel and the production of aluminium with annual production capacity of 300,000 tons or above. In the automotive industry, the manufacture of entire motorcycles, motorcycle engines and certain key car or motorcycle parts is no longer encouraged. New additions to the encouraged category in this industry include: development and research regarding entire cars and car engines, the manufacture of certain car parts and the electronic assembly and manufacturing of cars. In the electric and mechanical equipment manufacturing industries, investment in the manufacture of large-sized circled fluid bed (CFB) boilers of 300,000 kW is a new listing under the encouraged category but foreign involvement is limited to joint venture investment. Two more projects have been added to the already long list of electronic and communication equipment manufacturing projects that are encouraged: manufacture of key parts of large-screen colour projectors and reproduction of CD-ROMs and production of recordable CDs. Changes in the restricted category In the revised Foreign Investment Catalogue, foreign investment in the construction and operation of large-scale theme parks has been added to the restricted category. Other additions to this category are market research (only permitted in joint venture form) and the production and release of radio and television programmes and the making of movies (the Chinese party must hold a controlling stake). Changes in the prohibited category The revised Foreign Investment Catalogue lists social surveys as a new category in which foreign investment is prohibited.