China's investment catalogue comes under scrutiny

Theatrical films were missing from that list of media products. China has come under having a quota of only 20 foreign films a year. Despite the government's refusal to budge on this issue, a deal struck in February this year allows an additional 14 films in IMAX or 3D formats. Foreign companies also receive 25% of the box office profits; previously they received 13-17%.

This change was largely due to US vice president Joe Bidden placing pressure on his Chinese counterpart Xi Jinpeng during Xi's visit to Los Angeles, where the deal was signed. The change came less than a month after the release of the Catalogue.

China has also come under scrutiny from the WTO and the European Chamber of Commerce (ECC) over its automotive policies. China considers automotives as one of the nation's core industries and implements policies favouring domestic companies, who receive subsidies. There are also restrictions on exports of key raw materials and technology transfer requirements limiting access to foreign counterparts.

“The latest amendment to the Catalogue reflects China's protectionist stance where manufacturing of complete automobiles has been downgraded from encouraged to permitted,” said Chan.

There were two cases filed against China at the WTO in 2006 and 2012 over the treatment of US automotive parts and export restrictions for parts that are crucial in producing high-technology devices. But Chinese policymakers are not proving as flexible with automotives as they were with media products.

Despite efforts to encourage investments in new energy vehicles, foreign ownership in production of batteries and other key components is limited to 50%. However, this was previously scaled back from 50% ownership of all parts (including key components) for new energy vehicles in the draft amendments. The change came from lobbying efforts from the ECC.

Other examples from the latest Catalogue include encouraging investments in intellectual property rights services. IP infringement and piracy remain widespread and China has come under pressure to improve policy and enforcement. Encouraging investment in this area is a positive sign but reinforces the pressures needed for change.

“The effectiveness of the amended Catalogue and related regulations remains uncertain. Local governments continue to have considerable leeway in interpreting and enforcing the amended Catalogue” says Chan. For example, investments in the permitted category under $300 million require local government approval and those over require central government approval.

Items in the restricted and prohibited categories are usually politically sensitive as they affect the public interest. It is apparent that external pressure is important when it comes to opening up restricted or prohibited categories to foreign investment. This pressure is essential for areas that are still lacking foreign investment, such as the automotive industry, theatrical films and distribution of agricultural products.

As China's industrial policy comes subject to closer scrutiny, more areas will be open for foreign investment. China will find hard to justify why the items in the restricted and prohibited categories are not open to foreign investment.

By David Tring

Further reading:

Directing growth

Foreign Investment Industrial Guidance Catalogue (Amended in 2011) 外商投资产业指导目录（2011年修订）