Issuing Body: State Council
Issuing Date: April 6, 2010
Effective Date: April 6, 2010

Reflecting the determination of China's central government to attract additional foreign investment—and to direct that capital towards industries and regions that serve the government's broader social and economic goals—the State Council issued Several Opinions on Further Utilizing Foreign Capital (Foreign Capital Utilization Opinions) on April 6, 2010. The Foreign Capital Utilization Opinions set priorities that encourage foreign investment in research and development centers, high-end manufacturing, high- and new technology, alternative energy, and other environmentally friendly industries, while discouraging investment within industries that consume large amounts of energy, pollute the environment, or are already over capacity in China.

The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) are expected to formulate detailed rules for enforcement of the new policies in the coming months. Perhaps most notably, the two agencies are expected to revise the Foreign Investment Industrial Guidance Catalogue (Foreign Investment Catalogue), which categorizes industries as "encouraged," "restricted," and "prohibited" for foreign investment. The Foreign Investment Catalogue was last revised in October 2007. 

Provisions Encouraging Foreign Investment

The Foreign Capital Utilization Opinions establish—or in some cases merely reiterate—policies that broadly encourage foreign investment in China while simultaneously attempting to steer that money into specific industries or regions. One overarching goal is clearly to improve the quality of jobs created by foreign investment in China.

Some highlights of the Foreign Capital Utilization Opinions include:

• The State Council calls for revision of the Foreign Investment Catalogue to further open domestic markets to foreign investment, particularly in high-end manufacturing, high-tech industries, new technology, service industries, alternative energy, and environmentally friendly industries. Meanwhile, there are restrictions on projects that consume large amounts of energy, pollute the environment, or are in industries already over capacity.
• To some extent, the State Council reiterates—and lends its authority to—policies stated elsewhere. These include the Guiding Opinions on Providing Stronger Support of Financial Services for the Adjustment and Promotion of Key Industries and the Curbing of Overcapacity in Certain Industries. The Financial Support Opinions, which were issued and took effect in December of 2009, outline a number of initiatives intended to provide financial support for industrial restructuring in China.
• Multinational corporations are being encouraged to establish various types of functional organizations in China, such as regional headquarters, research and development centers, procurement centers, and financial management centers. Until December 31, 2010, for example, qualified foreign-invested research and development centers are exempt from import duties, value-added taxes, and consumption taxes on instruments imported for use in scientific and technical development.
• Development of the service outsourcing industry is encouraged.
• Foreign investment is encouraged in labor-intensive—yet environmentally sound—industries that have not benefited as much as the eastern regions of China from foreign investment. Foreign banks are also encouraged to expand their operations into those less-developed regions. This underscores the central government's other attempts to increase foreign investment in China's central and western regions,
• Approving formally what has been done in practice, the Foreign Capital Utilization Opinions allow regulators to delay or extend the capital contribution schedule for foreign-invested enterprises that have a good compliance record but are experiencing temporary financial strain.

Delegation of Approval Authority to Local Governments

For foreign investments that fall within the "encouraged" and "permitted" categories of the Foreign Investment Catalogue, the Foreign Capital Utilization Opinions significantly increase the threshold that must be reached to require approval by the central government agency. Previously, investments above US$100 million required approval of the National Development and Reform Commission; now investments below US$300 million require the approval only of local NDRC offices. This change is expected to reduce significantly the amount of red tape involved in foreign investments.

For projects that are within "restricted" industries, however, the threshold for central NDRC approval remains unchanged, at US$50 million.

In addition, the Foreign Capital Utilization Opinions require regulators to further simplify approval procedures, shorten processing times, and increase the transparency of review procedures and approval for foreign investment in China. The opinions also call for the use of online processing of applications and approvals.

Diversification of Foreign Investment Methods

Foreign investors are encouraged to participate in the restructuring of domestic enterprises by means of takeovers, equity participation, or investment in companies listed on the Shanghai or Shenzhen Stock Exchanges.

The Foreign Capital Utilization Opinions also encourage the establishment of foreign-invested venture capital investment enterprises and private equity funds, with viable exit mechanisms so that foreign investors can liquidate their stake and realize profits.

Security Review of Foreign Investment

While the Foreign Capital Utilization Opinions generally loosen restrictions on foreign investment—at least within certain industries—the opinions also call for the establishment of a new security review system for takeovers by foreign investors. What that system will involve remains unknown.

Conclusion

The issuance of the Foreign Capital Utilization Opinions reflects the strong intention of China's central government to further absorb and utilize foreign capital, particularly within certain favored industries. Partly because the opinions are not legislation, however, their precise impact cannot be predicted. Toward that end, the National Development and Reform Commission and the Ministry of Commerce will formulate detailed rules for enforcement of the new guidelines in the coming months.

Still, there's little doubt that foreign investors will have more investment opportunities in China, as well as a more favorable investment environment.