Guidelines on market access

Brigth future for strategic emerging industries

The revised “encouraged” category includes significant items related to “strategic emerging industries”. This reflects the dominant theme in China's current macro-economic and industrial policies, which emphasises high technology, new energy, new materials, environmental sustainability and value-added manufacturing.

This initiative is aligned with the Decision on Accelerating the Fostering and Development of New Strategic Industries (Guo Fa (2010) No.32) (国务院关于加快培育和发展战略性新兴产业的决定)(国发[2010]32号) (State Council Decision) issued on October 10 2010, according to which, “strategic emerging industries” refers to knowledge and technology-intensive, environmentally-friendly and high value-added industries which exhibit good potential for sustainable development.

The State Council Decision lists the following seven strategic emerging industries as the focus for China's economic development over the next two decades: (1) energy-saving and environmentally-friendly industries; (2) new generation information technology; (3) bio-industry; (4) high-end equipment manufacturing industries; (5) new energy industries; (6) new materials industries; and (7) new energy automotive industries. Unsurprisingly, the vast majority of new entrants to the “encouraged” category of the Draft Catalogue fall within these seven strategic emerging industries.

Examples of entrants include:

Energy-saving environmentally-friendly industries: air pollution control equipment manufacturing; solid waste and used items recycle and disposal equipment; recycling water plant construction and operation; production of environmentally-friendly refrigerants and detergents, and; manufacturing of heavy metal wastewater treatment plants.

The new generation of information technology: the next generation IPv6-based internet system equipment, terminal equipment, testing equipment, software chip development and manufacturing, and; 10 million plus pixel digital camera manufacturing.

High-end equipment manufacturing industries: high-quality artificial crystal and crystal film development and production; mobile portfolio water purification equipment manufacturing, and; manufacturing of touch systems (touch screen, touch components.)

New materials industries: R&D and manufacturing of environmentally-friendly quantisation materials for aviation, aerospace, and automotive motorcycles.

New energy, new energy vehicles and high-end equipment manufacturing industries: manufacturing of key components of new energy vehicles; high-tech green battery manufacturing; automobile battery production equipment design and manufacturing; motor vehicle charging stations, and; battery replacement station construction and operation.

According to the State Council's development goals, the increasing value of strategic emerging industries is expected to account for 8% of the GDP by 2015, and by 2020 this figure will increase to 15%.

An obvious implication of the Draft Catalogue is that the Chinese government has set significantly higher expectations for strategic emerging industries than for the traditional labour-intensive industries. In addition, previous demand for foreign capital and foreign exchange will be replaced by the demand for advanced intellectual property and technological innovations. To accelerate China's structural modernisation, it is foreseeable that the government will issue a series of encouraging policies designed to attract foreign investment to the strategic emerging industries.

As widely reported, the Ministry of Industry and Information Technology has been considering a tax incentive proposal to promote the development of high-tech, new energy, new materials and other strategic emerging industries. The tax incentive proposal includes a 50% deduction of enterprise income tax when the preferential treatment of “three year exemptions and three year reductions” expires.

Foreign investors would therefore be wise to appropriately adjust their investment strategies in China and seize the opportunity to take advantage of the government's favourable policies and tax incentives.

More support for certain modern service sectors

Besides strategic emerging industries, the Draft Catalogue has also added “logistics consulting services”, “venture capital industry”, “intellectual property services” and “vocational training” to its encouraged category. This is most likely a supplement to technological innovation, helping to contribute to a complete industrial chain.

Other modifications include the removal of “whole-set vehicle manufacturing” and “automotive research and development institutions” from the Draft Catalogue, which were formerly encouraged.

Restricted industries

Key amendments to the restricted category of the Draft Catalogue include “goods auction”, “financial leasing,” “franchise operations”, “commission operations” and “commercial management”, which are no longer restricted but fall under the permitted category.

Changes with regard to the medical sector are also worth noting. In the 2007 edition, foreign-invested medical institutions were restricted and could only take the form of equity or cooperative joint ventures. In the current Draft Catalogue, “medical institutions” can no longer be found under the restricted category and are thus permitted. Consequently, China's medical sector will be further opened up to foreign investors.

It should be mentioned that the increased opportunities for foreign direct investment in medical institutions began prior to the new Draft Catalogue. Since the beginning of 2011, investors from Hong Kong and Macau have been allowed to establish wholly foreign-owned medical institutions in the five regions of Shanghai, Chongqing, Guangdong, Fujian and Hainan provinces on a pilot basis. If the pilot proves successful, it is foreseeable that this initiative will be rolled out across the rest of the country in future.

Furthermore, in early 2011, the Ministry of Health delegated the examination and approval of joint venture medical institutions to local provincial level authorities, though the authority for approval of wholly foreign-owned medical institutions is still controlled centrally by the Ministry of Health.

Prohibited industries

Notable changes to the prohibited category include the addition of “villa construction and management,” which previously belonged to the restricted category. Taking into account the overall regulation in the property market, this further exemplifies the Chinese government's efforts to moderate the frenetic development of the real estate industry.

Nevertheless, it is anticipated that this re-classification may not have a material impact in practice. Due to stringent foreign exchange control and practical difficulties in purchasing land use rights, the presence of foreign investment in the development of villas has already been very limited and the proportion of foreign investment in the real estate industry is minimal. The Chinese government's reluctance to allow foreign construction and operation in villas may be attributed to concerns relating to the protection of arable land and the conservation of land resources.

Additionally, the Draft Catalogue has listed “domestic express delivery businesses” under the prohibited category. In fact, the question of whether to open the domestic express delivery service sector even to domestic private capital has been a fiercely contested issue. Its inclusion in the prohibited category for foreign investment indicates that the Chinese government may take more stringent measures to regulate this industry.

Final thoughts

Following the release of the Draft Catalogue, it is expected that the revised Catalogue will soon take effect officially. Some of the existing laws and regulations will be updated accordingly, and new rules and regulations will be issued.

The good news for foreign investors, who are keen to explore the Chinese market or wish to strengthen their investments in China, is that the market is gradually becoming more accessible. China's investment environment and regulatory framework are increasingly being improved and the government has clearly set its sights on future economic development and utilisation of foreign capital. Against the backdrop of a new round of amendments to market access policies and industrial guidance, foreign investors should grasp the opportunities and identify new priorities. Taking full advantage of industries encouraged by the government and preferential policies and measures, focus should be directed to the strategic emerging industries in order to exploit the competitive advantage of the Chinese market.

Aihua Chen, Gide Loyrette Nouel, Beijing