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China’s Revised Foreign Investment Catalogue Comes into Effect
1 May 2012

The 2011 revision of the China’s Foreign Investment Industry Guidance Catalogue (“New Catalogue”) was issued jointly by the National Development and Reform Commission and the Ministry of Commerce on 24 December 2011 and it came into effect on 30 January 2012. The Foreign Investment Industry Guidance Catalogue is an important reference for foreign investments in China. Full version of the Catalogue was first issued in 1995 and has been revised 5 times since then and the last revision was issued in 2007.

The Catalogue divides industry sections into 3 categories : encouraged, restricted and prohibited. The changes in the New Catalogue are consistent with the 12th Five Year Plan to develop industries such as information technology, environmental, value added manufacturing and services adopted by the National People’s Congress in March 2012.

Main Changes

There are now a total of 473 items in the New Catalogue, comprising 354, 80 and 39 items in the encouraged, restricted and prohibited categories respectively.

In order to enhance reforms in the manufacturing industries, the New Catalogue encourages foreign investments to use new technologies, new crafts, new materials, alternative energy and new equipment. New items have been added to the textile, chemical and mechanical manufacturing in the encouraged category.

(1) New Items Added

The New Catalogue encourages energy saving and environmental protection. New items added to the encouraged category include research and manufacturing of new energy vehicles and their key component parts. On the other hand, automobile manufacturing, polysilicon and coal chemical industry have been removed from the encouraged category probably to ensure the smooth development of the industries or to avoid over-capacity.

New services have also been added to the encouraged category, including motor vehicles charging stations, venture capital enterprises (which was originally in the permitted category), intellectual property service (which was originally in the permitted category), marine oil pollution clean-up technical services, vocational skills training etc. It shows that the PRC government is emphasizing more on the development of certain types of services provided by foreign investors. Further, unconventional natural gas resources exploration and development can now be in the form of either Sino-foreign cooperation or Sino-foreign joint venture instead of Sino-foreign cooperation only.

The New Catalogue also added to the encouraged category the next-generation internet system equipment based on IPv6 and removed the equity ratio requirement for new energy power generation equipment.

(2) Items Moved or Removed

To coordinate the development in different regions in China, some items in the New Catalogue have been removed from the encouraged category and these items will be considered in the revised Catalogue of Priority Industries for Foreign Investment in Central and Western China instead.

Franchising, financial leasing, commodity auctions, the production of carbonated soft drinks, importing and distribution of books, newspapers and magazines and medical institutions have been lifted from the restricted category and are now classified as permitted.

The sale of vehicles and medicine has also been moved from the restricted category to the permitted category.

In line with the environmental protection policy, the possessing of nuclear fuel, manufacturing of paints and colours which contain toxic compounds are now re-categorized as restricted.

As expected and consistent with the recent PRC economic policy, the development and operation of villa projects have been changed from the restricted category to the prohibited category. Further, domestic mail delivery services are now placed under the prohibited category.

Transitional Arrangement

Foreign investment projects approved after the effective date of the New Catalogue (ie 30 January 2012) will follow the provisions of the New Catalogue whilst projects approved prior to 30 January 2012 should be implemented in accordance with the Foreign Investment Industry Guidance Catalogue revised in 2007. However, any future capital increase, share transfer or overseas listing of the existing enterprises will be subject to the New Catalogue.

Conclusion

Potential investors should be aware of the changes to the Foreign Investment Industry Guidance Catalogue in making their plans for investments in China as the changes reflect the priorities of the Chinese government. Even those who already have establishments in China should note that any future plans for capital increase or share transfer in relation to their existing companies will be affected by the New Catalogue.

If you have any questions to the above or other issues on foreign direct investments, joint ventures, mergers and acquisitions or doing business in Mainland China, experienced lawyers in our China Business Department will be happy to assist you.

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