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 [link no longer exists]. The official press release explaining the new Catalog can be found here [link no longer exists]. 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 policies 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.

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.