Foreign Investment in the Energy Sector In China

In order to address the challenges of such a situation, China has been developing a series of rules to attract and encourage foreign investment to the energy market, for which the relevant policies are detailed below.

Main Policies Regulating Foreign Investment in the Energy Market

Industry Policy

The latest version of Catalogue of Industries for Guiding Foreign Investment jointly issued by the National Development and Reform Commission (NDRC) and the Ministry of Commerce will take effect on Dec 1 2007. Saving resources and protecting the environment are the main principles.

In accordance with the guidelines, China will ban foreign players from mining some "important minerals that cannot be recycled" as well as high-energy consuming or highly-polluting projects:

• Tungsten, tin, antimony, molybdenum and rare earth exploration are in the 'prohibited' category for foreign companies;
• exploration for gold, silver and platinum will also be on the restricted investment list; and
• foreign firms will also be restricted or forbidden to invest in projects which emit high amounts of pollution or consume excessive amounts of energy.

The new policy orientation shows that foreign investment is encouraged in environmental-friendly projects which calls for a recycled economy, clean energy utilization and ecological environment protection, all of which require advanced technology.

China welcomes foreign investment in oil shale, oil sands, heavy oil and super heavy oil, but the guideline categories still limit foreign investment in oil refining. At the same time, China is attempting to attract foreign investment into renewable energy.

The new Catalogue is in line with the new Renewable Energy Law the country has adopted for over a year. It is an important regulation which illuminates the clear direction and threshold for foreign investors in the energy sector with a high maneuverability; it also serves as guidance for the establishment of foreign-invested enterprises [FIEs] and relevant taxation policies in energy industries.

Taxation Policy

FIEs engaging in encouraged energy fields are eligible to apply for preferential tax treatment. Under the Notice Regarding Expanding Applicable Scope Of Preferential Rules For Tax Policies On FIES Engaged In Infrastructure Projects of Energy and Transportation, preferential tax treatment includes the following:

• Lower (15%) FIEs' corporate income tax rate;
• extension of the peroid of corporate income tax reduction and exemption of Hi-tech FIEs;
• exemption of FIEs' withholding tax, which is usually charged at 10% of gross income for cross-border technical service fees.

Financial Policy

The government is undertaking a series of financial support measures for the development of FIEs in the energy field where a Chinese party is involved. The state has set up a special industry investment fund to relieve the tension of capital shortage for a Chinese party involved with the FIEs during the process of building up capital. Also, for a sino-foreign joint venture, the state will approve the domestic Chinese-funded commercial bank to grant equity loans in a certain proportion to Chinese shareholders if the capital contributed by foreign investors shall be injected in due course.

In accordance with the principle of steadiness and wariness, the state supports foreign investors engaging in an encouraged energy sector by providing insurance services with the coverage of political risk, performance risk, guarantee risk, and other such risks.

Up to now, over 100 foreign companies are engaged in the mineral resources prospecting business in more than 400 projects ranging from petrol and natural gas to copper and coal mines. EU and US governmental organizations are also busy setting up various foundation projects to encourage Chinese local government and enterprises to seek low-emission and clean-energy technology with the assistance of foreign parties. For shrewd foreign players, the competition for a position in China's energy market is only beginning.