Civil Aviation Sector Seeks New Investments

The Provisions were intended to improve upon the initial aviation sector guidelines contained in the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) (the Catalogue), as well as provide investors with a clearer and more detailed legal framework. The Catalogue states that Chinese parties must maintain majority ownership of all PRC civilian airports and public air transport enterprises, thereby limiting foreign investments in these areas to 49%. The Provisions not only repeated this stipulation but also placed further limitations on public air transport enterprises by capping shares held by any single foreign investor (including affiliated enterprises) to no more than 25%. This restriction reflects the authorities' interest in maintaining management control of public air transport enterprises, which continues to outweigh their stated interest in attracting foreign investors. In addition to the equity cap placed on investments in PRC airports and public air transport enterprises, the Provisions also expanded application of the 49% cap to include foreign investments in general aviation enterprises that engage in business flights, air tours and industrial services as well as aircraft maintenance and aviation fuel businesses.

The Provisions provided some leeway to foreign investors, however, by including a provision that would allow for flexibility in the proportion of shares held by foreign investors in certain aviation-related businesses. It is implied that foreign investors would be permitted to control a majority stake in businesses such as general aviation enterprises that engage in agricultural, forestry and fishery services, cargo shipping and warehousing, ground services, in-flight catering and parking facilities.

Domestic Private Investment

The CAAC has also tried to create more opportunities for private Chinese investors. The PRC press recently reported that the CAAC drafted a regulation that will ease restrictions on private investment in the aviation sector. A CAAC spokesman has been quoted as saying that the new regulation, which will reportedly be promulgated towards the middle of 2003, will differentiate between domestic and foreign investors by placing fewer restrictions on investments originating within the PRC. While the press has also noted statements by CAAC officials that private airport investments in provincial capitals and major tourism areas will not be permitted to exceed 50%, it has not been stated that this restriction would be applied to airports in other areas. It remains to be seen whether the authorities will allow privately held majority ownership of Chinese airports for the first time.

Recent reports suggest that the first privately owned Chinese airport might soon be a reality. In February, the PRC press reported that the CAAC approved the application of Wang Junyao, a private investor, to buy 100% of Yichang Airport. Yichang Airport, located in Hubei province, is approximately 30 kilometres from the Three Gorges Dam Project. As the dam will dramatically alter the region's spectacular landscape, the Three Gorges area has attracted scores of tourists wishing to catch a final glimpse of the area before it is submerged. Despite all of the tourism-related business that the Yichang Airport has handled recently (and the considerable government revenue accruing therefrom), it appears the CAAC will not be too restrictive in its interpretation of the draft regulation's exclusion of majority private equity control of airports in major tourism areas. While finalization of the Yichang Airport sale most likely remains subject to approval by either the Ministry of Finance or the newly established State Assets Management Commission, the fact that Wang Junyao has already received approval from the CAAC is a key indication that the sale is likely to go through. The CAAC has traditionally played the role of policy maker in aviation issues, whereas the Ministry of Finance and the State Assets Management Commission are expected to act only as safety nets to prevent the fire-sale of state-owned assets.

If completed, the sale of Yichang Airport to Wang Junyao's Junyao Group will mark a breakthrough in Chinese policy towards the privatization of the aviation industry.

What Foreign Investors May Expect

Although it is unlikely that the new regulation governing domestic private investments in the aviation sector will directly address restrictions on foreign investment, it is likely that the regulation will increase foreign investment opportunities. Since domestic private investors often lack the know-how and experience required to operate airports and other aviation businesses, increased cooperation between domestic private investors and foreign investors is likely. As a result, the liberalization of airport control to domestic investors may provide an opportunity for foreign investors to increase their level of participation in the PRC aviation industry.

By Zhou Yun and Peter Dempsey,

Freshfields Bruckhaus Deringer, Shanghai