The Revised Foreign Investment Catalogue: Grounds for Optimism?

The Encouraged Category

As the encouraged category comprises about two-thirds of the New Catalogue, it is not surprising that most of the changes (including additions, deletions and revised descriptions) occur in this category. It should be noted that the classification of industry sectors has been dramatically changed. For example, the mining industry is a new category containing certain items belonging to the coal industry, the non-ferrous metals industry and oil industry in the 1997 Catalogue. The purpose of the reorganization reportedly was to follow the national industry statistics classification. Nevertheless, the change of classification of the industry sectors makes it difficult to compare the 1997 Catalogue and the New Catalogue and identify all of the changes.

The revised encouraged category has the following common features:

Many Sectors Reclassified from Restricted or Prohibited into Encouraged

Having worn their knuckles bare knocking, foreign investors will be delighted to see that the doors to many previously restricted industries are finally open. Most notably, manufacturing of complete automobiles and motorcycles as well as their engines; manufacturing of coal power, water power, nuclear power and electricity transmission equipment; planting and nurturing of Chinese medicinal plants; production of natural incense; construction and operation of railroad main networks; airline transportation companies; construction and operation of pipelines, warehouses and special harbours for oil and gas; development of ordinary residential housing; construction and operation of closed-end roads in urban areas; and accounting, auditing and higher education. Most of these industries formerly were in the restricted category.

Direct Reference to China's WTO Commitments

One unique feature of the New Catalogue is that many newly added items are directly copied from the Protocol. In fact, selected portions of the Protocol are attached to the New Catalogue as an Appendix. As a result, China's WTO commitments with respect to geographical limits, quantitative restrictions, business scope, ownership percentages and time schedules in various industries have been incorporated directly into the New Catalogue. This method, while a bit cumbersome in that one must check both the body of the Catalogue and the Appendix for provisions regarding a particular industry, does address the issue of the domestic legal effect of the WTO and the New Catalogue provides the necessary implementation legislation.

There are ten items in the encouraged category that make direct reference to the Protocol, including: oil and gas exploration; manufacturing of complete automobiles and motorcycles; international sea transportation and international container transportation; road cargo transportation; wholesaling, retailing and distribution of ordinary commodities; and accounting and auditing.

Preferential Policies for Central and Western Areas

The 1997 Catalogue only contained one reference to special preferential treatment for industries in the inland and western areas of China. After the 1997 Catalogue was issued, a series of preferential policies was adopted to promote development and foreign investment in these economically less developed provinces. The Guiding Foreign Investment in the Dominant Industries of the Central and Western Regions Catalogue, promulgated in 2000, treated all dominant industries listed as encouraged foreign investment projects.

In response to the recent emphasis on the development of the central and western areas, the New Catalogue contains preferential policies for many more sectors willing to locate in these areas. There are four businesses (mining and dressing of low-grade, refractory metallurgical ores, exploration for, and mining of, copper, lead and zinc ores, exploration for, and mining of, aluminium ores, and smelting of low-grade, refractory metallurgical ores) in which wholly foreign-owned companies are only allowed in the western areas. In two areas, production of top-quality float glass at a daily fusion capacity of 500 tonnes or more, and production of new types of dry cement at a daily output of 2,000 tonnes or more of clinker, only those businesses established in the central and western areas fall into the encouraged category.

Reflecting the Rapid Pace of Industrialization in China

China's industrial development has been dramatic since the 1997 Catalogue was issued. The modifications to the encouraged category reflect these changes. The New Catalogue continues the 1997 Catalogue's emphasis on development of new or high technology capable of improving product quality and efficiency, new technology/equipment for utilization of resources, and prevention of environment pollution. Not surprisingly, the encouraged category contains many new projects in the electronics and communication equipment manufacturing and special equipment manufacturing areas where technology is upgraded rapidly. In contrast, the number of encouraged projects in traditional industries such as ordinary machinery manufacturing, ferrous metallurgy and the coal industry has been reduced.

The Restricted Category

Major changes occurred in the following areas:

Consolidation by Merger of Restricted Category A and Category B

As discussed in the article on pages 19