New Foreign Investment Guidelines

New Foreign Investment Guidelines

An Overview

China's National Development & Reform Commission and the Ministry of Commerce issued the revised foreign investment guidelines (commonly called the Catalogue on Guidelines for Foreign Investment) on the 7th of November 2007.

The revised guidelines took affect on the 1st of December 2007 and make it more difficult for foreign investors to enter a number of sectors that the central government is trying to rein in.

In the meantime, there are some sectors that have been added to the encouraged category - energy efficiency and environmental protection, for example, being the most welcome sectors to foreign investors.

The following provides a breakdown on the sectors / industries affected by the new guidelines and briefly compares the changes with the previous guidelines (2004 version).

Exploration and Mining

In general, the revised guidelines now prohibits foreign investment in what China calls "rare minerals that are not renewable", but continues to encourage foreign investment in difficult mines or mines in underdeveloped areas of China.

The range of encouraged sectors has shrunk. Sectors such as the exploration and mining of coal and associated resources; and the exploration and mining of copper, lead, zinc and aluminium have been removed. Moreover, some sectors have been added to the restricted category i.e. the exploration and milling of phosphorus; and the exploitation of ocean manganese nodules and sea sands.

The most constricted change is the exploration and mining of tungsten, tin, antimony, molybdenum, and fluorite which are now completely banned from foreign investment as per the in 2007 version, which was previously only restricted.

Three sectors have been added to the encouraged category, including the exploration and mining of non-normal oil resources such as oil shale, oil sands, heavy oil, extra heavy oil, etc; the exploration and extraction of natural gas hydrate (but limited to contractual joint ventures only); and the development and application of new technologies that can enhance the usage of mine tailings.

Electricity, Gas and Water

This sector has a warmer attitude to foreign investors. The main change has been that the construction and operation of electricity networks / grids no longer belongs to prohibited category, but is now in the restricted category. That means foreign investors can invest in electricity networks / grids with appropriate approvals. In addition, projects utilising seawater (i.e. desalination) and industrial sewage treatment are included in the encouraged category, while the construction and operation of natural gas power stations has been removed from 2004 version.

Transportation

China has experienced fast growth in the infrastructure sector including highways, railways, and airports. This sector is expected to continue to grow at a high rate for some years to come.

In the 2007 version of the guidelines, projects in relation to express railway maintenance; special passenger rail-lines; and city-to-city rail-lines have been added to the encouraged category.

Property and Real Estate

Foreign investors interested in the property / real estate sector in China look to be hard hit with the new guidelines - a clear intention by the central government to cool this sector down.

The 2007 version has removed real estate development from the encouraged category; where previously in the 2004 version, the development of ordinary residences was included. Investment in real estate agencies or brokerage of second-hand properties has now been added to the restricted category.

Financial

According to China's commitments in relation to WTO, the financial sector is now fully open to foreign investors. Foreign investment in the trading of futures has now been changed from prohibited (as per the 2004 version) to the restricted category (now in the 2007 version). However, these entities still must be majority held by a Chinese party.

Culture, Sports and Entertainment

There are two areas that have been added to the restricted category in this sector. One being performance broking companies (which must be majority held by a Chinese party); and the other the operation of entertainment facilities (limited to an equity or contractual joint ventures).

There are also two areas that now fall in the prohibited category. The first being news related websites, internet audio visual programming services, internet bars, and internet culture related operations; and the second is the construction and operation of golf courses.

Another change is television program and film production. This was previously limited to joint ventures where there was a majority held by Chinese party (as per the 2004 version). According to the 2007 version of the guidelines the "majority held by a Chinese party" has been removed (note: needs to still be joint venture).

Medical

The development and application of human stem cells; gene diagnosis and therapy technology has been added to the prohibited category.

Mapping

Geodetic measurement; marine mapping; aerial photography for mapping purposes; border and topographic mapping; and electronic navigation mapping for; etc has been added to the prohibited category.

Services

Two areas that have been added to the restricted category in the services sector include creditability related investigations and appraisal services; plus photography services, including acrobatic photography services such as aerial photography (excluding aerial photography for mapping) which is limited to joint ventures only.

This information has kindly been provided by GNS China, a corporate and investment advisory firm that specialises in the China market. For further information, please contact GNS China at: info@gnschina.com or visit: www.gnschina.com.