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Foreign Direct Investment In China: It All Just Changed

By Dan Harris and Steve Dickinson

By Steve Dickinson As a highlight to the opening of the National People's Congress, Premier Wen Jiabao gave a very complete report on the current issues of major concern to the Chinese government. An English language summary of his report can be found here: The full report in Chinese can be found here. Following on his report, the Xinhua News Service issued this headline story: "China's overseas investment policy to discourage smokestack industries." In "China FDI: Quality Not Quantity," we blogged on how China revised its foreign investment policy to encourage "quality" rather than "quantity." I also discussed this in an article I wrote for the China International Business Magazine, entitled, "Quality Over Quantity" The Xinhua article summarizes China's new policy as follows:

Under the revised edition of Guidance Catalogue for Overseas Investment Industries, promulgated by the government in December, overseas investors are being encouraged to enter fields such as recycling, clean production, renewable energy, environmental protection and efficient use of resources. They are restricted or banned from entering energy-intensive, polluting sectors or certain certain fields of resource exploitation, and export tax rebates for 1,115 commodities in these sectors have been ended.

How can an investor determine exactly what is prohibited? In the new Catalogue for Overseas Investment, the prohibited category does not contain any reference to the banned activities. The history of prior approvals also provides no guidance, since the Xinhua article states that 84% of foreign investment in China in 2005 was made in polluting industries that would now be banned. The investor in 2008 is therefore required to take an entirely different approach. Our job as attorneys is not to ask questions but to answer them. So, the answer is as follows. The State Council promulgated the Interim Regulation on Promoting the Adjustment of Industrial Structure (???????????? ) on December 7, 2005. On the same day, the National Development and Reform Commission issued the Guiding Catalogue for the Adjustment of Industrial Structure. The Adjustment Catalog divides industries into three categories: "encouraged," "restricted," and "to-be-eliminated". For restricted industries, no new investment is permitted. Those that are "to-be-eliminated" are to be restructured or shut down as quickly as possible. There are 190 industries listed in the restricted category and 399 in the to-be-eliminated category. A good discussion of the regulation and catalogue can be found here. Under Chinese law, no industry in the restricted and to-be-eliminated categories can be the object of new investment. Foreign investors are subject to the same Chinese laws as domestic investors, so this restriction applies to foreign investors in the same way it does to domestic investors. This means that the prohibited category in the Catalog for Foreign Investment is actually much larger than listed there. In addition to the relatively small number of prohibited investments currently listed in the new Catalog for Foreign Investment, it is necessary to add the 599 banned investments from the Adjustment Catalog. This enormously expands the number of investments banned in China for foreign investors. Any potential investor must therefore carefully consult the Adjustment Catalog before deciding whether or not to pursue an investment in China. As we pointed out in a recent post, "China M&A: Can You Hear Me Now?" China is serious about enforcing its foreign investment rules and it is a waste of time to go against them. Unfortunately, the Adjustment Catalog has not been translated into English, which means its provisions have received almost no coverage from either the mainstream media or the blogosphere. It is therefore important to get advice on this issue from someone who can deal with the Chinese language documents in an impartial manner. Local government officials in the investment promotion area do not fall into this category. The rules have changed. Drastically.

Full post as published by China Law Blog on March 06, 2008 (boomark / email).