22 January 2020
The property sector is now almost fully open to foreign investors with limits to shareholding and scope of business all removed. Photo: Bloomberg
The property sector is now almost fully open to foreign investors with limits to shareholding and scope of business all removed. Photo: Bloomberg

Good and bad news for foreign investors in China

On March 13, the National Development and Reform Commission and the Ministry of Commerce jointly released a new version of Catalogue for the Guidance of Industries for Foreign Investment, which governs restrictions on investment from abroad. The last version of the catalogue was issued in 2011.

Generally speaking, the new catalogue, which will take effect on April 10, marks a greater opening-up, with the number of restrictions on foreign investment reduced to 38 items from 79. At the same time, the number of forbidden items decreased from 38 to 36.

The manufacturing industry saw 26 restrictions removed, the largest number among all industries.

The remaining restrictions in the manufacturing sector are basically related to national and industry security. They covered production of edible oil; deep processing of rice, flour, raw sugar and cotton; printing of publications; smelting of rare metals; auto manufacturing; repair, design and manufacturing of ships; and ground receiving equipment for satellite TV and radio stations.

With the latest deregulation, China’s general manufacturing industry is almost fully open to foreign investors.

Manufacturers of chemicals, medicines and construction machines are expected to be the biggest beneficiaries as numerous restrictions affecting their sectors will be lifted.

Foreign investors’ access to the country’s booming internet industry is also getting wider, with restrictions on e-commerce and online sales scrapped. This means that foreign investors can set up their e-commerce businesses without having to form a joint venture or controlling a Chinese company.

The property sector also saw great loosening, with limits to shareholding and scope of business all removed. That makes it also almost fully open to foreign investors.

The change is likely a result of the fact that Chinese enterprises have already had a lion’s share in the industry and the central government is now keen to stabilize the real estate market amid fears of steeper economic slowdown.

Another remarkable progress lies in the removal of a clause that empowered the State Council to issue special or industrial policies to regulate foreign investment. Instead, the new catalogue makes it clear that “laws and regulations of the country” can impose bans that are not listed in the catalogue.

These changes carry great significance. They mean that the government, including the State Council, will not be allowed to freely impose bans on foreign investment. New bans will have to be added through the approval of the legislature and agreements with foreign governments.

Given that legislations undergo complicated procedures and take time, imposition of bans will not be as easy and quick as it used to be. Clearly, China’s top leadership wants to show to foreign investors their commitment to the rule of law, the centerpiece of President Xi Jinping’s reforms.

What is more, the new catalogue can serve as an important reference for China’s national negative list. The country is working on its Foreign Investment Law, the draft of which shows that foreign investors will be governed through a negative list.

Since the new catalogue is likely to be the last version before the law is enacted, the negative list is very likely to be based on this catalogue, which is generally investor-friendly.

Nonetheless, foreign investors need to be wary of certain difficulties. For example, a few new bans and restrictions are added.

Wholesale and retail sales of tobacco, previously restricted, are now under the banned list. The same change is seen in legal counseling.

Investment in higher and pre-school education must be done in cooperation with the Chinese side, and the Chinese will have to play the major role in the partnership. In addition, auction of cultural relics and operation of antique stores are now restricted for foreign investors.

Other restrictions come in the form of more stringent antitrust scrutiny, widespread crackdown on commercial corruption and removal of local incentive policies.

Foreign investors also face a generally tougher investment environment in China due to the economic slowdown, increases in production and labor costs, and narrower profit margins.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.