China FDI: Quality Not Quantity

CLB's own Steve Dickinson has a column in the most recent issue of China International Business on China's new foreign direct investment (FDI) rules. The article is entitled "Quality Over Quantity" and it is on how China is doing with foreign investment exactly what it has said it would do, emphasizing quality over quantity.

Last month, China's National Development and Reform Commission released a new and substantially revised “Catalog for the Guidance of Foreign Invested Enterprises,” which became effective on December 1, 2007. This new catalog "drastically" changes China's approach to foreign investment. The new catalog divides foreign investment into "encouraged," "restricted" and "prohibited" investments and it embodies the following five key policies:

1. Encouraging investment in advanced technologies and modern manufacturing, and discouraging investment in traditional enterprise sectors. Modern logistics and service outsourcing have been added to the encouraged category. Foreign investment is no longer encouraged in those industrial sectors in which China has already mastered basic technical skills or in which China already has adequate facilities.

2. Encouraging investment in sustainable resources and environmental protection. Foreign investors are encouraged to support sustainable development, cleaner production, and environmental protection. On the other hand, foreign investment in high resource-use, high-energy-use and high-pollution enterprises is restricted or prohibited. Foreign investment in mining of certain rare minerals and energy resources (coal) is also restricted or prohibited.

3. Discouraging investment in export-oriented enterprises. Due to China's trade imbalance and excessive accumulation of foreign exchange, investment in enterprises solely devoted to export processing will no longer be encouraged. This is a dramatic reversal of the former policy, which strongly encouraged investment in export-oriented enterprises.

4. Encouraging coordinated development among China's regions. The emphasis in earlier catalogs on developing China’s western regions has been abandoned. The new Catalog places all the regions on the same footing with respect to encouraged investment.

5. Stressing protection of the national economy. China continues to take a cautious approach to the opening of investment in areas involving national security or sensitive areas of the economy. The new catalog prohibits foreign investment in various forms of publications, broadcasting and media production. Various internet based businesses have been added to the category. The catalog maintains the traditional prohibition of investment in golf courses, gambling, pornography and armaments.

China is attempting to create an open framework for foreign investment that helps promote its own vision of China's future.