Official encouragement

The Regulations on Guiding the Direction of Foreign Investment took effect on April 1. The regulations repeal provisional regulations were issued in June 1995.

The new regulations apply to all forms of foreign investment in China. Like the 1995 provisional regulations, the new rules set forth four categories of foreign investment project: 'permitted,' 'encouraged,' 'restricted' and 'prohibited'. The regulations broadly define the scope of these categories. Whether a specific foreign investment project falls into a particular category should be determined with reference to the Guideline Catalogue of Industries for Foreign Investment (the latest version was issued on March 13) and the Guideline Catalogue of Favourable Industries for Foreign Investment in Central and Western China. Those projects that do not fall within the 'encouraged', 'restricted' and 'prohibited' categories are classified as belonging to the category of 'permitted' foreign investment.

Clarification of restrictions
The structure of certain foreign investment projects may be restricted, regardless of which category applies. The Guideline Catalogue of Industries for Foreign Investment may stipulate that foreign investment projects should be 'limited to equity joint ventures and co-operative joint ventures', 'controlled by Chinese parties' shareholding' or 'relatively controlled by Chinese parties' shareholding'. Unlike the 1995 provisional regulations, however, the new regulations help to clarify these restrictions by providing the following definitions:

'Limited to equity joint ventures and cooperative joint ventures' means that only Sino-foreign equity and co-operative joint ventures are allowed.

'Controlled by Chinese parties' shareholding' means that the investment of Chinese parties should account for 51 per cent or more of the total investment in the project.

'Relatively controlled by Chinese parties' shareholding' means that in a foreign investment project, the percentage of total investment by Chinese parties should be higher than the investment percentage of any foreign party.

Like the 1995 provisional regulations, the new regulations state that 'encouraged' foreign investment projects that involve the construction and operation of energy and transport infrastructure and which require a large investment with a long payback period shall receive preferential treatment and may expand their relevant business scopes upon approval. The new regulations have added urban utilities to this category of infrastructure projects, including projects related to coal, oil, natural gas and electricity, railways, highways, ports, airports, city roads and sewage and waste treatment.

Incentives for exporters
The regulations also encourage foreign investment projects to export by upgrading their categorisation based on export volume. 'Permitted' foreign investment projects that export all of their products will be deemed to be 'encouraged' projects. 'Restricted' foreign investment projects whose export sales account for 70 per cent or more of their total sales will be deemed to be 'permitted' projects upon approval by the competent local authorities.

The regulations provide that 'permitted' or 'restricted' projects that can truly bring into play the advantages of China's central and western regions may have relevant restrictions relaxed. Those that are listed in the Guideline Catalogue of Favourable Industries for Foreign Investment in Central and Western China may enjoy preferential policies for 'encouraged' foreign investment projects.

The most significant development is the elimination of the 'restricted category (A)' and 'restricted category (B)' distinction contained in the 1995 provisional regulations.

The new regulations simplify matters by providing that all 'restricted' foreign investment projects that fall within the approval limits shall be examined and approved by the relevant competent department of the province, autonomous region or municipality. However, these local authorities must still file their approvals with the competent department at the higher level and the department in charge of the industry.

This article was written by Scott Silverman, an associate at Freshfields Bruckhaus Deringer. He can be contacted by email (Scott.silverman@freshfields.com).