Breaking News: China Changes Foreign Investment (FDI) Rules
By: Steve Dickinson
Last week, China's National Development and Reform Commission announced the issuance of a new and substantially revised Catalog for the Guidance of Foreign Invested Enterprises (Revised 2007) 外商投资产业指导目录（2007 年修订). The Chinese version can be found here The official press release explaining the new Catalog can be found here. The NRDC's English language website is strangely silent on the issue and we are not aware of any English language translations of the new catalog. The press release issued by the China Daily has been altered for foreign consumption and should not be relied upon.
The Catalog provides the basic guidance for foreign investment in China. It divides investments into "encouraged," "restricted" and "prohibited" categories. In the 2007 catalog, the encouraged section is more than twice the length of the 2004 Catalog. The restricted and prohibited categories are not substantially changed, but do contain some surprises. The major changes to note in the 2007 Catalog are the following:
1. There has been a substantial restriction on foreign investment in real estate and real estate brokerage firms. Construction and operation of luxury hotels, villas, office buildings and conference centers has been placed in the restricted category. In this context, this means an absolute prohibition. This is a surprising move since this business seems to have little impact on the domestic Chinese real estate market.
2. Continued restriction and prohibition of participation in publishing, media, market research and social research. In recognition of the influence of the Internet as an alternative publishing source, various Internet based businesses have been added to the prohibited category. This denial of access for media and publishing is a hot button for the United States and the Chinese do not seem willing to budge a bit on this.
3. Opening of the service area to logistics and service outsourcing by placing these in the encouraged category. The service area continues to be opened to foreign investment. The addition of outsourcing to the encouraged category is important. China is trying to catch up with India as an outsourcing center. Dalian in particular is being pushed as a location for such businesses.
4. The new policy discourages or prohibits foreign investment in businesses solely devoted to export (a 180 degree reversal of prior policy). The new policy restricts or prohibits investment in industries China has already mastered (like toys, furniture, shoes, clothing) or in industries with high usage of resources or energy (like steel, aluminum, paper, cement, other basic industries). This is another 180 reversal of prior policy. The message is that there will be no more dumping of outmoded or wasteful production in China. Whether China can successfully implement this policy at the local level remains an open question.
The 2007 Catalog can only be understood in light of the policy it implements. It embodies the decision at the highest levels of the PRC to make substantial changes in China's approach towards foreign investment. This approach was stated in detail by the National Development and Reform Commission in the 11th Five Year Plan on Foreign Capital Utilization 利用外资“十一五”规划, issued in November of 2006. That Plan states China will move from emphasing the quantity of foreign direct investment (FDI) to emphasizing the quality of that investment.
This new approach will involve the following:
- - Shifting from using foreign capital to make up for a shortage of investment funding and foreign exchange to using foreign capital to introduce advanced technology, management experience and high quality talent to China.
- - Focusing on ecology, environmental protection, conservation and the comprehensively utilizing its resources.
- - Combining the use of foreign capital with the upgrading of domestic industry and technology.
The 2007 catalog is another step in Beijing's plan to reform the environment for foreign investment in China. It is consistent with other measures which eliminated the tax break for foreign invested enterprises, limited foreign M&A activity, and eliminated many supports for export oriented enterprises. It appears China is serious about making this change and foreign investors need to become familiar with this new system. As one official told me: "China intends to use foreign investment rather than be used by foreign investors."
It is a new world and foreign investors must understand that the system is undergoing a dramatic change. I will be doing a series of follow up posts explaining the most important issues in the new Catalog.
http://www.chinalawblog.com/cgi-bin/mt/mt-t.cgi/2241
Breaking News: China Changes Foreign Investment (FDI) Rules:
» Foreign Investment In China, Part II: Can You Say Last Nail In The Real Estate Coffin? China Law Blog
By: Steve Dickinson This is the second in a multi-part series on the changes to China's foreign investment laws as reflected in its 2007 Catalog of encouraged, restricted and prohibited investments. Part I of this series can be found, entitled, "Breaki... []
Comments
Any changes to healthcare investments?
Posted by: ryan | November 12, 2007 9:54 AM
This represents an updating of Beijing's investment policy to more closely reflect how it sees China's role in the world economy.
My first takeaway is that there is increased nationalism in terms of protecting what is seen to be China's key national interests. From an American perspective, this reflects backing away from certain globalization commitments. This underscores my belief that globalization will ultimately fail; it cannot overcome nationalism and protectionism which I have covered in this posting:
http://www.chinavortex.com/2007/10/why-globalization-will-fail/
When push comes to shove, everyone does what they see as being in their own best local and national interests.
Posted by: Paul Denlinger | November 12, 2007 5:47 PM
AmCham had an English translation up on their site from at least yesterday. There are some healthcare industry changes, particularly in some leading-edge research areas.
Overall, this is an excercise in industrial policy - there is a lot of picking and choosing going on to satisfy various economic policies.
Posted by: Stan Abrams | November 12, 2007 6:02 PM
While I see all this as being unavoidable and probably in the best interests of China (and who can blame them) my first, sceptical, thoughts were that this just opens up another major channel for graft at the local level. Benefits will flow out from foreign companies trying to stay in business and they will also flow out from domestic companies who are in direct competition with foreign companies and would like to see them moved on and out. But then again, I am the most sceptical and cynical person in China, at times.
However, I also don't see it as a attempt to restrict 'globalisation'. Nobody is saying that domestic markets will be closed to foreign competition, they're just saying that if you want to sell it here, then make it in your own back yard. I could think of many arguments to support this if I were the owner or CEO of a domestic company competing with a foreign company in the same market - especially when the foreign company was given incentives to move into the nice new development zone and then given tax breaks as well. We've had our easy ride, now it's time to do business. If only they would completely flatten out that playing field and blow away all the 'firework smoke'.
Posted by: PiPi | November 12, 2007 6:43 PM
Ryan,
Healthcare is mostly encouraged. We will be running a post on that fairly soon.
Posted by: China Law Blog | November 13, 2007 8:10 AM
Paul Denlinger,
Of course countries will do what suits their own interests, but that only begs the question.
Posted by: China Law Blog | November 13, 2007 8:12 AM
Stan Abrams,
It is all about policy, but some of the policies are difficult to understand (hotels?). I will check out AmCham.
Posted by: China Law Blog | November 13, 2007 8:13 AM
PiPi,
I tend to agree. These rules are supposed to apply only to business going forward.
Posted by: China Law Blog | November 13, 2007 8:14 AM
Chris D-E,
I agree with you that we all saw something like this coming. How many times have we heard Beijing say it wanted to move away from high polluting low value manufacturing and on to something better?
I am not so sure I like the giant hand though and I wonder if countries will react to this by tightening down their own hatches against Chinese inbound investment.
Posted by: China Law Blog | November 13, 2007 8:16 AM
The logical outcome of this is that you will see many new startups from western countries entering China at a much earlier stage, and registering as Chinese companies. This also means granting Chinese citizenship to key IP inventors.
This will mean that you will see many original inventions and IP coming from what are Chinese companies, sold first in China, then exported to other countries.
I have already seen a few examples of this happening. Interesting, isn't it?
Posted by: Paul Denlinger | November 13, 2007 3:02 PM
Chris D-E,
When I saw your comment come in, I could not understand why you were saying what you were. Now that I see it in the context of my prior comment, I do.
Ha, ha, ha. Must be British humor, not that I don't absolutely love the show, Extras.
Posted by: China Law Blog | November 13, 2007 6:16 PM
Paul Denlinger,
Please explain. I don't see the connections.
Posted by: China Law Blog | November 13, 2007 6:17 PM
Steve has emailed me with the following:
1. Some of the comments make it sound like I am opposed to the new changes. Actually, I think the overall new policy is very good. I don't know what I said in the first post to give that impression and it bothers me somewhat.
2. The only thing they are doing that I don't understand is this thing with luxury hotel properties. Why target that? As you say [in an email I wrote to Steve], there is really no surplus of high end hotel rooms in China. They are slamming the brakes, but in a crude way. They are adopting a policy that might be appropriate for Shanghai but that does not apply to most other places in China. The technique is more sophisticated than it looks, however. By not placing the items in the prohibited category but by forcing all decisions through Beijing, they think they can turn things on and off at will. However, the real estate market does not work that way. Deals come and go too quickly to wait for the whims of Beijing.
Posted by: China Law Blog | November 13, 2007 6:27 PM
Thanks for very interesting article. btw. I really enjoyed reading all of your posts. It’s interesting to read ideas, and observations from someone else’s point of view… makes you think more.
So please keep up the great work. Greetings.
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