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State Council Issued New Policies Encouraging Foreign Investment

China’s State Council issued Several Opinions on Further Improving the Work of Utilizing Foreign Investment, (Guofa [2010] No. 9) (the “Opinions”) on 6 April 2010. The Opinions set out its guideline on the future development of China’s foreign investment policies.
China’s State Council issued Several Opinions on Further Improving the Work of Utilizing Foreign Investment, (Guofa [2010] No. 9) (the “Opinions”) on 6 April 2010, setting out its guideline on the future development of China’s foreign investment policies.

The Opinions contain five sections, including adjustment of encouraged foreign investment, guiding foreign capital to invest in China’s central and western regions, diversifying the approaches of foreign investment, streamlining the foreign investment regulatory system and improving the efficiency of the approval process, and improving the investment environment for foreign investors.

Encouraged Foreign Investment

The Opinions spell out broadly the industries and the geographic regions in China where foreign investment is encouraged. According to the Opinions, foreign capital will be encouraged to invest in high-end manufacturing, high-tech development, modern services, new energies, environment protection and energy saving projects, and be restricted from high-polluting and high-energy-consuming projects or the industries of overcapacity. China will amend its Catalogue of Industrial Guidance for Foreign Investment (the “Catalogue”) to provide details of the encouraged industries.

In particular, the Opinions provide that foreign investment in developing high and new technologies will be encouraged. China will continue to improve its hi-tech enterprise recognition system to enable foreign-invested enterprises benefited from the status and provide supports to the qualified Sino-foreign joint technology development projects. Multinational companies are encouraged to set up in China their functional centers such as regional headcounters, research and development, procurement, finance and settlement centers. In addition, the Opinions provide that foreign investors are encouraged to participate in reorganization of domestic enterprises by means of takeover, equity acquisition etc.. China encourages foreign investors to become strategic investors of the companies listed on its domestic stock exchanges, and will continue to reinforce regulation on foreign investment in domestic securities and on acquisition of domestic-listed companies. The Opinions also provide that China will expand the qualifications for foreign issuers authorized to issue RMB-denominated bonds to allow more issuers to benefit from domestic financial resources. The Opinions confirm that China is looking to having more qualified foreign-invested enterprises listed on its domestic stock exchanges. The Opinions also state that China will expedite, on the pilot basis, the process of market opening to foreign-invested guarantee companies. It will continue to encourage investment from foreign-invested venture capital and private equity funds, and to improve the regime for their exit.

The Opinions also outline China’s policies on foreign investment in its central and western regions. The Opinions reiterate that China will continue to encourage foreign capital to invest in its central and western regions. Environmentally friendly and labor-intensive projects are particularly encouraged in the regions. The Opinions allow local governments to offer various supports to qualified foreign-invested projects, which include financial supports and preferential corporate income tax treatments, in order to attract the desired investment. It is specifically mentioned in the Opinions that foreign banks are encouraged to set up their operating branches in the regions.

Encouragement Measures

The Opinions set out several specific measures benefiting qualified foreign investment. For instance, by the end of 2010, qualified foreign-invested research and development centers are entitled to exemption of China customs duty and value-added tax for the import of necessary goods related to the research work; discounted land prices at 70% of the statutory minimum price will be available for some qualified projects falling under the “encouraged” category; the approved capital contribution schedule may be extended when foreign investors encounter temporary financial difficulties and cannot follow the schedule to make capital contributions to their enterprises in China. Details of the encouragement measures and qualification requirements are to be specified in following implementing rules.

Approving System Reform

The Opinions generally commit to reform and improve its current foreign investment approving system to streamline the procedures, to shorten the process and to reduce to the extent possible the scope of such approvals. The Opinions have provided a concrete adjustment to the current allocation of the approving powers to reflect its resolution of reducing approval. According to the Opinions, for the foreign investment projects with total investment amount below US$300 million and falling under the “encouraged” or “permitted” categories under the Catalogue, the approving power are now with the local government. Previously, the threshold was at US$100 million. The rise of the threshold, however, does not apply to the projects on which the approving power is expressly reserved for the central government under the Catalogue of Investment Project Subject to Government Approvals. The foreign-invested projects under the “restricted” category with total investment amount above US$50 million remains with the central government. The Opinions expressly permit the central government to delegate the approving power to its local counterparts with exception to financial or telecom projects.

Conclusions

We believe the Opinions have pointed out the direction of future development of China’s foreign investment policies. Following highlights may be worth noting:

1. As a part of China’s plan of upgrading its domestic industries and economic-growth strengths, China will place restrictive measures on foreign investment in the traditional industries including the labour-intensive, polluting, energy-consuming or low-tech manufacturing and processing industries. Gradually, China will guide the expansion of capability in some of these industries to its less-developed central and western regions. Investment in technology-intensive projects will continue to be encouraged.

2. The overall incentives available to foreign investors will be reduced, but some qualified projects falling under the newly-defined “encouraged” category will still be able to benefit from various preferential treatments such as tax incentives, preferential land granting treatments or financial subsidies from the State or local government.

3. China will gradually expedite the opening of its financial market to foreign investors to diversify the approaches of foreign investment in China. However such a process will be rather slow and steady.

4. China will reform its current gate-control system applied to foreign investment. The focus of control will be shifted from all foreign investment projects to only those significant projects, and from all aspects to some selected aspects, such as foreign exchange, anti-monopoly control, national security etc.