New guide reduces many restrictions, but investors must stay sharp to prosper in maturing Chinese market

On March 13, the National Development and Reform Commission and the Ministry of Commerce jointly released a new version of the Catalog for the Guidance of Industries for Foreign Investment, which governs restrictions on investment from abroad. The previous version of the document, which specifies industries banned, restricted and encouraged for foreign investors, was issued was in 2011.

Generally speaking, the new catalog, which will take effect on April 10, greatly widens market access for foreign investors, with the number of restrictions on foreign investment reduced to 38 items from 79. At the same time, the number of forbidden items decreased from 38 to 36. The opening-up is remarkable.

The manufacturing industry saw 26 restrictions removed, the largest number among all industries. The remaining restrictions in manufacturing are basically related to national and industry security or in areas where domestic players are very fragile. These restrictions cover production of edible oil; deep processing of rice, flour, raw sugar and cotton; printing of publications; smelting of rare metals; auto manufacturing; repair, design and manufacturing of ships; and ground receiving equipment for satellite TV and radio stations.

With the latest deregulation, China's general manufacturing industry is almost fully open for foreign investors. Manufacturers of chemicals, medicines and construction machines are expected to be the largest beneficiaries, because all of the numerous restrictions imposed upon them are now being lifted.

Foreign investors' access to China's booming Internet industry is also getting wider, with restrictions on e-commerce and online sales scrapped. This means that foreign investors can set up their online retail and e-commerce businesses without necessarily having to form a joint venture or controlling a Chinese company through a variable interest entity, which is an entity in which an investor has less than a majority interest.

The property industry also is loosening up, with early limits associated with shareholding and scope of business all removed. That is to say, the industry is almost fully open to foreign investors. The change is likely a result of the fact that Chinese enterprises already have the lion's share in the industry and the central government is now keen to stabilize the real estate market amid fears of a steeper economic slowdown.

More remarkable progress lies in the removal of a clause that empowered the State Council to issue special or industrial policies to restrict or ban foreign investment in certain areas. Instead, the new catalog makes it clear that it is "laws and regulations of the country" that can impose bans that are not listed in the catalog.

These changes carry great significance. They mean that the government, including the State Council, the highest executive organ of state power, will not be allowed to freely impose bans on foreign investment. New bans will have to be added through the approval of the legislature and agreements with foreign governments. Given that legislation has to undergo complicated procedures and takes time to be promulgated, imposition of bans will not be easy and quick as it used to be.

Through this revision of the catalog, China's top leadership wants to highlight its commitment to the rule of law, the centerpiece of President Xi Jinping's reforms.

More than being a document that regulates foreign investment, the new catalog offers a clue to China's future investment policy landscape. It can serve as an important reference for China's national negative list. Such a list states the sectors in which foreign investment is banned or restricted, instead of listing where it is allowed, and is considered clearer and easier to follow.

The country is working on its Foreign Investment Law, the draft of which said China would govern foreign investors with a negative list. Since the new catalog is likely to be the last version before the law is enacted, the negative list is very likely to be based on this catalog, which is generally investor friendly.

Now that the positive side has been explored, there also are difficulties foreign investors need to be aware of.

First, a few new bans and restrictions are added.

Wholesale and retail tobacco, which previously were on the restricted list, have now been moved to the banned list. A similar change is also seen with legal counseling.

For newly added items, higher learning and preschool education are now subject to cooperation with the Chinese side and the Chinese side must play the majority role in the partnership. In addition, cultural relics auctions and running antiques stores are now restricted for foreign investment.

But for foreign investors as a whole, the bigger challenge is the changing investment environment in China, underpinned by the government's less-welcoming attitude toward low-end foreign investment and tougher law enforcement measures including much more stringent antitrust scrutiny, a widespread commercial corruption crackdown and removal of local incentive policies. That's without mentioning the economic slowdown, increases in production and labor costs, and narrower profit margins.

Therefore, while the door is opening wider for foreign investors, making money in this market, where local players have grown up and the legal framework is becoming sounder, could be even more challenging. Indeed, it requires foreign investors to refine their strategy to survive and maintain competitiveness in China.

The author is a researcher at the Chinese Academy of International Trade and Economic Cooperation in Beijing. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 03/27/2015 page11)