PRC Legal Updater (Issue 15)

4 January 2012

Contacts

NDRC and MOFCOM issue a new version of the Foreign Investment Industrial Catalogue

The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly issued a new version of the Foreign Investment Industrial Catalogue (the 2011 Catalogue) on 29 December 2011. The 2011 Catalogue will come into effect on 30 January 2012 and the 2007 version will cease to be effective at the same time.

The 2011 Catalogue has added more environmentally-friendly and high-end industries to the “Encouraged” category compared to the 2007 version and has removed some that are not considered environmentally-friendly or high-end from the same category. Generally, the 2011 Catalogue is more focused on encouraging foreign investment in industries involving alternative energy resources, new methods of energy utilisation, energy efficiency, R&D and high/new technologies.

There are also some notable changes in the final version of the 2011 Catalogue as compared with the draft version released for public consultation purposes in April 2011. For instance, nuclear power-related equipment manufacturing was removed from the “Encouraged” category in the final version and as a result, it will fall within the “Permitted” category. Another notable difference is that the threshold for triggering the imposition of a foreign shareholding restriction has been lowered for the construction and operation of pipeline networks for gas, heating and water supply/drainage: in the draft version of the 2011 Catalogue, foreign shareholding restrictions in this sector only apply to projects in cities with a population of at least 1 million but in the final version, a foreign shareholding restriction will apply to relevant projects in cities with a population of at least 500,000.

The 2011 Catalogue sends a clear message that China will continue opening up its market to foreign investment and at the same time it also demonstrates China’s attempts to make better use of foreign investment for upgrading its own industrial abilities.

By way of background, the Chinese government categorises foreign investments into four different categories: “Encouraged”, “Restricted”, “Prohibited” and “Permitted”. The 2011 Catalogue (and its previous versions) sets out specific industries falling within the first three categories while those not explicitly mentioned therein are generally regarded as “Permitted” industries. As the name of each category suggests, foreign investment in a “Prohibited” industry is not possible at all; foreign investment in a “Restricted” industry is generally speaking subject to foreign shareholding restrictions and/or to strict scrutiny by the relevant approval authorities. In contrast, foreign investment in an “Encouraged” industry could enjoy preferential treatment on taxation or other advantages. Finally, foreign investment in a “Permitted” industry would normally neither encounter particular strict regulatory obstacles nor enjoy any exceptional advantages.