Reforming China's Approval System for Investment Projects

The Decision: gives full play to the market allocation of resources, thus granting companies a greater say in their own investment decisions; categorizes investment projects by "source" (state, domestic private and foreign investment projects); subjects a project, depending on the source of investment, to one of the following levels of government review: approval (shenpi), verification (hezhun) and reporting for the record (bei'an); and delegates the approval powers in respect of foreign investment projects further to local authorities.

Foreign Investment Projects

Under the Decision, all foreign investment projects will be subject to a verification process, even if they do not fall in the 'Catalogue of Investment Projects Subject to Government Verification', which is appended to the Decision (the Verification Catalogue). The Verification Catalogue now only applies to domestic private investment projects. For foreign investment projects, the relevant legislation is still the Foreign Investment Industrial Guidance Catalogue(外商投资产业指导目录).

The verification process for foreign investment projects will not differ much from the current foreign investment approval process. The National Development and Reform Commission (NDRC) and its local branches will continue to approve application reports, while the Ministry of Commerce (MOFCOM) and its local branches will approve joint venture contracts and/or the articles of association. Our informal inquiries with the authorities suggest that the application report may be simpler in form, but will probably incorporate most items required in the old project proposal and the feasibility study report, which have now been merged into the application report.

The good news for foreign investors is that under the Decision local authorities will enjoy enhanced approval powers. The local branches of NDRC and MOFCOM at the provincial level can authorize: encouraged projects with a total investment less than US$100 million; permitted projects with a total investment less than US$100 million; and restricted projects with total investment of less than US$50 million.

With respect to encouraged projects, the central NDRC and MOFCOM are attempting to withdraw authority from their local branches. Previously there was no upper limit on the approval authority of the local branches of NDRC and MOFCOM, and encouraged projects with a total investment above US$100 million could be approved. Under the Decision, however, there is an upper limit restricting the local authorities.

Any increase of total investment by a foreign investment project will require verification. According to MOFCOM officials, encouraged projects and permitted projects only require central approval if there is an increase of US$100 million to the original investment.

Domestic Private Investment Projects

The Decision will have the most significant impact on projects funded by domestic private investors (Domestic Private Investment Projects).

Now, unlike state investment projects, Domestic Private Investment Projects will not be subject to the approval process, although if listed in the Verification Catalogue, they are subject to a verification process. The Verification Catalogue covers two types of projects: redundant investments (such as steel, cement, aluminium and auto-making) and investment in sensitive areas primarily reserved for state investment (such as oil, gas, telecommunications, post services and airports).

It is unclear whether the verification process is a marked improvement, although the application procedure appears more streamlined. Project proposals, feasibility study reports and project launching reports are required for the approval process, while the verification process requires only an application report. Domestic Private Investment Projects not listed in the Catalogue, irrespective of size, will only be required to report to the local branches of NDRC for the record.

State Investment Projects

Under the Decision, "state investment" appears to refer to "direct disbursement of funds from the government budget" and not "state-owned assets or resources". State investment projects appear to be projects directly invested in by the State. Certain types of projects with state funding (such as state subsidies) are not classified as state investment projects. It is unclear whether a project with state funding and foreign investment will be treated as a state investment project or a foreign investment project.

State investment projects will undergo the most stringent government scrutiny: the NDRC and its local branches will review the project proposal and feasibility study report, and approve the preliminary design plan and the project's project. The Decision affirms state investment shall target areas where "national security is concerned or [where] there is failure of the market allocation of resources", and investment from non-state sources will be encouraged in other areas when available.

The Decision is based on the policy goal of establishing market-regulated investment mechanisms. But it will not be clear how much freedom investors can enjoy in making their investment decisions until the detailed implementing rules come out.