FDI changes draw praise, spark confusion

Based on regulations that are already available, such as in the Shanghai Free Trade Zone (FTZ), where transaction processing businesses such as e-commerce do not allow for more than 55% overseas ownership, and in Guangdong, where it permits 55% under the CEPA license, it is unlikely that an unlimited foreign shareholding structure will be implemented nationwide, Tan said.

Wenfeng Li of Weil Gotshal & Manges said that the authorities may make an exception for e-commerce and declare that the 50% restriction will not apply. The deregulation trend will continue, he added.

“The changes are consistent with the government's campaign to abolish unnecessary administrative approvals, reduce chances for corruption and allow the market to play a leading role in resource allocation,” Li said. “But, despite the impact of these new rules, implementation is the real question. Procedural access may still remain unchanged due to existing regulations governed by industry bodies.”

The Catalogue, released by the National Development and Reform Commission (NDRC) on November 4 2014, makes it clear that China is pushing for technology, productivity and even creativity in areas it believes diversification and foreign expertise are needed. It has added industrial design to the encouraged category, as well as power grids, waste water treatment and infrastructure assets such as electric transmission and transformation equipment. The amendments benefit a greater number of industries such as high tech, services, clean energy and real estate.

An interesting development is that many manufacturing sectors have been deleted from the restricted category, said Andrew McGinty of Hogan Lovells. Joint venture provisions have also largely been removed.

“China is shifting away from restricting the manufacturing of sensitive products like chemicals and pharmaceuticals,” he said. “Telecommunications equipment, petroleum processing, manufacturing and general purposes equipment have also been deleted from the restricted category and the manufacturing of large scale precision instruments is now encouraged.”

Aviation takes off

Another industry that the Catalogue has opened up is aerospace and aviation, which is now in the encouraged category.

Regional general aviation jets are now encouraged, and ownership restrictions bound by the Sino-foreign JV requirement under the Catalogue currently in effect have been removed. Companies involved in avionics, engine components as well as the design, manufacturing and repair of civil aircraft and satellites are no longer required to have a Chinese majority stake.

“This illustrates China's ambition of playing a leading role in this sector but being aware of lacking the required technology,” said Tan.

Win some, lose some

On the other hand, auto manufacturing has been placed in the restricted category.

“The authorities, in particular the NDRC, still wish to protect Chinese companies, especially in industries where they compete with foreign investors,” said Weil's Li. “Although the number of cars sold in China has skyrocketed in recent years and it is now the number one car market in the world, local brands still have a relatively low share.”

Committees such as the European Chamber of Commerce have said that replacing the Catalogue with a short negative list like one in the FTZ would be more ambitious.

“But, at the end of the day, not everything will move at the same pace as in the FTZ,” said McGinty. “The changes to the Catalogue reflect what China wants, not necessarily what foreign investors want.”

By Katherine Jo