The new revised version of the Foreign Investment Industrial Guidance Catalogue (2011) (the “New Catalogue") was issued on 29 December 2011 by the National Development and Reform Commission (“NDRC") and Ministry of Commerce. It came into force on 30 January 2012 and superseded the Catalogue published in 2007. This New Catalogue demonstrates some major adjustments on Chinese’s foreign investment policies, signifying China continuous efforts in opening up its market by encouraging foreign investment in a growing number of sectors.

I Introduction

Compared with the 2007 version, this New Catalogue encourages more foreign investment in high-tech industries and high end manufacturing; enhances energy conservation and environmental protection, and promotes modern service industry. Certain industries are now listed as “encouraged", while several are downgraded from “encouraged" to either the “restricted", or in some cases, the “prohibited" category. In some industries, certain requirements on the mandatory equity ratio between foreign and Chinese investors are now adjusted or removed. The followings are some main revisions to be underlined in the New Catalogue:

Encouraged Category

   (1)automobile manufacturing, polysilicon and coal chemical industry are no longer encouraged;

(2)Manufacture of new energy automobiles, including research and manufacturing of new energy vehicles and their key components and parts and the building and operation of power charging stations, are promoted to the encouraged category ;

(3)Development of energy conservation technologies, recycling of various products (including plastics, electronic products, automobiles, electromechanical equipment, rubber, metal and batteries), are upgraded to the encouraged category;

(4)Foreign investors are now encouraged, as opposed to just being “permitted" before, to invest in venture capital enterprises, a sign of China’s intention to open up the market to foreign investors;

(5)Institutions for Intellectual Property services, such as patent and trademark agents and intellectual property consulting companies, are upgraded from the “permitted" to the  encouraged category;

    (6)Vocational education and training is now included in the encouraged category;

    (7) Equipment for internet system based on Internet Protocol Version 6 is added to the encouraged category;

(8)Strategic emerging industries, such as information technology, biotechnology, high-end equipment manufacturing, new energy, new materials, etc., are  placed in encouraged category.

Permitted Category

 (1)Manufacturing of automobiles is downgraded from the encouraged to permitted category, proportion of foreign investment in this area will be capped at 50%;

   (2)As part of China’s efforts since its access to the World Trade Organization to gradually open up its financial services sector to foreign investment, financial leasing companies are now stripped from the “restricted" status and promoted to the permitted category;

   (3)Commodity auctioning services are now upgraded from the restricted to permitted category;

   (4)Manufacturing of carbonated soft drinks is no longer “restricted" and is now in the permitted category;

(5)Commercial companies engaging in franchise or commission business or business management are upgraded from the restricted category to the permitted category;

(6)Medical service institutions is promoted to the permitted category from the restricted category;

(7)Distribution and import of books, newspaper and magazines, and the import of audio and visual products and electronic publications are upgraded from the prohibited category to the permitted category.

Restricted or Prohibited Category

   (1)Domestic mail courier services are removed from the permitted category and included into the restricted category;

   (2)In consistent with Chinese authorities’ efforts to cool down the real estate market, villas construction is downgraded from the restricted category to the prohibited category.

II Changes related to the Energy Sector

In the aim to fulfill government’s objectives to enhance resource conservation and environmental protection, there are some major changes in relation to the Energy Sector:

2.1 Mining Industry

Within the mining industry section, the encouraged category and the restricted category are both enlarged, whereas the prohibited category remains almost unchanged.

Encouraged Category

(1) Scope of encouraged investment is expanded: Item 9 of this section “Exploration and exploitation of submarine gas hydrates (limited to Sino-foreign cooperative joint ventures)" is changed into “Exploration and exploitation of unconventional natural gas resources such as shale gas and marine gas hydrate (limited to Sino-foreign equity joint venture and cooperative joint venture operations)". This item revises the Chinese expression of “submarine gas hydrates" into a professional term, and enlarges the “encouraged" items to shale gas and other unconventional natural gas resources.

(2) Equity Joint Venture is permitted: under item 5 of this section, “Development and application of such new technologies for oil exploration and exploitation as geophysical prospecting, well drilling, well logging, mud logging and down-hole operations"; Item 6 “Exploration and exploitation of unconventional oil resources including oil shale, oil sand, heavy oil and extra-heavy oil", and Item 9 “Exploration and exploitation of unconventional natural gas resources such as shale gas and marine gas hydrate", all of the above encounter a cooperation model change from “limited to Sino-foreign cooperative joint ventures" to “limited to Sino-foreign equity/cooperative joint venture operations".

Restricted Category

(1) Revision to the expression of “special and rare coal": the Chinese expression of “special and rare coal" under Item 1 of this section is changed so as to be in line with the unified terms used by authorities such as NDRC and the Energy Bureau.

(2) Scope of limitation on exploration and mining is expanded: Item 4 of this section, “Exploration and mining of diamonds and other precious non-metallic metals" is revised to “Exploration and mining of diamonds, high-aluminum fireclay, wollastonite, graphite and other important non-metallic metals". The expression of “precious non-metallic metals" is revised to “important non-metallic metals", and the number of listed items also increased. It is obvious that this revision has placed more limitations on foreign investment in the exploration and mining of non-metallic metals. The revision to Item 5 of this section is for the same purpose.

2.2 Manufacturing Industries

In the broadly defined “manufacturing" sector, there are a number of significant changes in the New Catalogue, reflecting the government’s intention and policy orientation of favoring foreign investment in energy conservation, environment protection, new information technology, biotechnology, high-end equipment manufacturing, new energy, new materials, and other strategic emerging industries.

Encouraged Category

(1) Manufacturing of raw chemical materials and chemical products: “Large-scale production of coal chemical products" is removed from the encourage category to the permitted category, which reflects the prudence of NDRC on the entrance into coal chemical industry.

(2) Non-metallic mineral products: more items are now encouraged in order to enhance foreign investment in the field of energy saving, environmental protection, waste recycling, high strength, light weight, high performance and multi-function material development.

(3) Nonferrous metals melting and rolling industry: the production of polysilicon, high performance storage hydrogen material and electrode materials for lithium ion batteries is downgraded from the encouraged category to the permitted category in order to control the industry overcapacity in these areas.

(4) Metal products manufacturing industry: encouragement in  manufacturing  new light-weight and environment-friendly material is extended from the field of automobiles and motorcycles to aviation and aerospace. Manufacturing of nickel-saving stainless steel products is added into the “encouraged" category, enlarging the scope of foreign investment in this area.

(5) Special-purpose equipment manufacturing industry: there are many revisions in the field of mining, geophysical and oil exploration and drilling equipment manufacturing. The main changes are, increasing requirements on the performance parameter of the equipment, mainly encouraging foreign investment in the field of high-end equipment manufacturing, encouraging the use of new technology, processing, material and equipment to promote traditional industries.

(6) Transportation and communication equipment manufacturing industry: manufacturing of automobiles is downgraded from the encouraged to permitted category; on the other hand, manufacture of key parts and components of new energy automobiles is being listed in the encouraged category.

(7) Electric machinery and equipment manufacturing industry: the New Catalogue straightened the requirements or put more limitation on the original encouraged items, such as changing “Manufacture of key auxiliary equipment used for 600,000-kilowatt ultra-supercritical thermal power units" to “Manufacture of key auxiliary equipment used for 1,000,000 -kilowatt ultra-supercritical thermal power units"; and increases manufacture of high-tech green batteries, refrigeration equipment for air conditioning applying renewable energy (air source, water source, ground source), and cancels the requirement of “Sino-foreign equity/cooperative joint venture operations" from the item “manufacture of complete sets of equipment or key equipment for power generation with new energy resources", which all reflects the encouragement of foreign investment in the field of renewable energy.

Restricted Category

(1) Petroleum processing, coking and nuclear fuel processing industries: the New Catalogue brings a more specific limit on the construction and operation of refinery by clearly by stating that foreign investment in industry involving atmospheric and vacuum refinery with the annual output below 10 million tons, the catalytic cracking with the annual output below 1.5 million tons, the continuous reforming (including aromatics extraction) with the annual output below 1 million tons, and the hydrogen cracking production with the annual output below 1.5 million tons will all be restricted.

Prohibited Category

(1) Main revision in this section of the New Catalogue is prohibiting mercury-contained, alkaline zinc-manganese button batteries in “electric machinery and equipment manufacturing industry". This also reflects government’s objectives to suppress foreign investment in non-environmentally friendly industry and promote the development of green energy industry.

2.3  Power, Gas and Water Production and Supply Industries

Encouraged Category

(1) The construction and operation of vehicle charging and battery replacement stations are put in this category, reflecting government encouragement in the development of renewable energy.

Restricted Category

(1) Extend the restriction on “construction and operation of, in small grids, power plants using coal-fired and steam condensation thermal generator sets with a single generator capacity of 300,000 kilowatts or less, and thermoelectric power stations using coal-fired, steam condensation and extraction thermal generator sets with a single generator capacity of 100,000 kilowatts or less" to the whole country, rather than just within Tibet, Xinjiang and Hainan. This reflects government’s policy of shutting down small thermal power units; That is, foreign investment in constructing and operating small thermal power units is restricted within the scope of small grids, and is prohibited outside the scope of small grids.

(2) Specifically placed restriction on investing the “construction and operation of pipeline networks for gas, heat, water supply and sewage in cities with population over 0.5 million.

From the aforesaid revisions on the energy related sectors, it is noticeable that the New Catalogue has demonstrated the goal of the government to develop a strategic plan for emerging industries, to further restrain overcapacity industry, and to accelerate the structural adjustment of the economy. It also reflects the aim of Chinese government to upgrade China’s industrial structure by encouraging foreign investment in the field of energy conservation, environmental protection, new information technology, biotechnology, high-end equipment manufacturing, renewable energy, new materials, new energy automobiles and other strategic emerging industries. As commented by a NDRC official, the New Catalogue has faithfully reflects government’s objectives to “expands the fields for foreign investment and optimizes the structure of foreign investment". The New Catalogue has provides a clearer guidance to foreign investors in China, however, at the same time, may have disappointed some of the foreign investors in traditional industries.

Notwithstanding above, according to NDRC, part of the removed “encouraged" items will be taken into account when revising the Catalogue of Priority Industries for Foreign Investment in the Central and Western Regions (“Central-Western Catalogue") in order to promote Central-Western Region based on the principles of industries transfer as well as the development of featured industries. Therefore, those foreign investors who are interested in investing in the Central-Western shall closely follow the revision of the Central-Western Catalogue.

For further information, please contact the lawyer listed below.

GAO Yan

Beijing Office

86-10-5957-2081

gaoyan@zhonglun.com

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