New Western Catalog Details Preferential Foreign Investment Industries in Central and Western China

by Davis Wright Tremaine LLP
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According to the state media agency Xinhua, Central and Western China received $19.21 billion USD of foreign investments in 2012, or 17.2 percent of the country’s total foreign investments ($111.7 billion USD). In efforts to spur the development of China’s interior regions, which include faraway territories such as Xinjiang and Inner Mongolia, the NRDC recently promulgated the Catalog of Priority Industries for Foreign Investment in the Central-Western Region, clarifying guidelines as to preferential industries for investment as well as noting tax and business incentives for foreign investors who choose to do business in China’s heartland.

Background  
The National Development and Reform Commission (NRDC) and the Ministry of Commerce (MOC) jointly promulgated the new version of the Catalog of Priority Industries for Foreign Investment in the Central-Western Region (hereafter referred to as the Western Catalog) on June 10. It replaced the previous Western Catalog, last updated in 2008. The new Western Catalog complements the 2011 Catalog for the Guidance of Foreign Investment (hereafter referred to as the Catalog), promulgated earlier this year. Together, the two serve as the “basis of applicable policies for guiding the examination and approval of foreign investment projects and foreign invested enterprises,” according to the 2002 Provisions on Guiding Direction of Foreign Investments.

The provisions and catalogs are applicable to “Chinese-foreign equity joint-ventures, contractual joint-ventures, wholly foreign owned enterprises,” and other foreign investment projects. The Catalog classifies industries open to foreign investment into three categories: ‘encouraged,’ ‘restricted,’ and ‘prohibited.’ Industries not listed are ‘permitted’ and are open to foreign investment pending supplementary government approval. The Western Catalog lists province-specific industries in which investment is particularly encouraged. Encouraged industries may receive tax benefits or other incentives.

Policy aims
Following the 12th Five Year Plan for Utilization of Overseas Capital and Investment Abroad and the 2010 State Council Opinions on Further Improving the Utilization of Foreign Investments, both catalogs focus on encouraging foreign investments in higher value-added and more environmentally friendly industries. Changes in oversight protocol will delegate some of the NRDC’s regulatory authority to local or regional commissions. The new catalogs aim to shift labor intensive manufacturing away from China’s east coast and spur sustainable economic growth in mid-western provinces.

Regulatory and approval changes
The aim of the catalog has historically been to encourage the growth of value-added industry sectors and export-oriented industries, and to aid the development of domestic technological innovation. Categories in which domestic industries already exist, have a legacy of state investment and ownership, or are deemed “key to social stability” are generally restricted. In the new Catalog, the number of encouraged categories has increased overall and restrictions on foreign investment equity ratios are 11 fewer than in the 2007 version. Automobile manufacturing has been removed from the encouraged category to motivate domestic industry growth and other industries in danger of overproduction or redundant construction have gained new restrictions on foreign investments.

Regardless of classification, all foreign investment project proposals must be submitted for examination and approval by the NRDC and relevant provincial and local Development and Reform Commissions. Depending on a project’s size and categorization, some applications for foreign investment may be exempt from NRDC review or be eligible for a shorter review process.

Clarifying a point of confusion from the 2007 Catalog for the Guidance of Foreign Investment, the Catalog declares that in the case of discrepancies, provisions in the special regulations, industry policies of the State Council, or bilateral treaties will prevail over those listed in the Catalog.

These two policy revisions will hopefully go some ways toward alleviating the misunderstandings caused by vagueness or unclear regulation hierarchies in previous catalogs. In keeping with an official focus on promoting foreign investment opportunities, it is hoped that these and other changes will simplify and streamline the application process for foreign investment projects across the nation. Since applications for foreign investment are viewed on a case by case basis and subject to much more than the guidelines laid out in the catalogs, however, it is likely that the foreign investment application process, although somewhat explicated, will remain a complex undertaking.

Investment benefits for ‘encouraged’ industries
Heavy manufacturing or labor intensive investment projects which may have previously been drawn to China’s highly developed east coast will receive a reduced tariff tax of 15 percent, lower tariffs on imported equipment, and simplified licensing and approval procedures in Central-Western China. These and other benefits granted to encourage industries will hopefully motivate foreign investments to shift westward. Information industries such as telecom and broadband see a limited easing of investment restrictions and some service industries—notably, medical and senior care services—have been newly opened to foreign investors.

Changes in the Western Catalog
The new Western Catalog lists over 500 encouraged industries and covers 22 provinces, having added 173 new categories and the province of Hainan to the scope covered by the 2008 Western Catalog. Some restricted or prohibited industries are included as province-specific encouraged categories. In particular, small-scale coal-fired steam-condensing power plants are encouraged in Xinjiang. Whole vehicle manufacturing and auto parts processing (restricted in the general Catalog) are also encouraged in many Central-Western provinces. In general, investment in auto parts manufacturing with higher technology requirements is encouraged across Midwestern China, so long foreign investors’ shares are limited to less than 50 percent.

Other restricted industries, such as media and animation production, are encouraged in some central and western provinces under the condition of limited foreign ownership or cooperative joint venture ownership. Notably, foreign investment is now encouraged in medical and senior care industries.

Public services such as gas, heat, and water supply pipe network building, highway transport services, broadband and telecom are encouraged across nearly all provinces in the Western Catalog. Ecotourism projects and the development of key national ecological projects are encouraged. Investments in agricultural projects remain encouraged, with particular emphasis given to the sustainable development of the use of animals and herbs in traditional medicine.

Detailed breakdown of the new Western Catalog (from the U.S.-China Business Council, June 12, 2013)

 Industry

Item

Provinces with   encouragement

 Agriculture

Water-saving irrigation and conservation tilling technologies

Liaoning, Anhui, Inner Mongolia

 Autos

Production of whole vehicles (with Chinese majority ownership)

Chongqing, Yunnan, Xinjiang, Sichuan, Shaanxi, Ningxia, Inner Mongolia, Guizhou, Guangxi, Gansu, Anhui

Production of high-performance radial tires

Chongqing, Ningxia, Liaoning, Jiangxi, Hubei, Henan, Hainan, Guangxi, Anhui

 

 Entertainment

 

Production of radio and TV programs, and films (limited to cooperative JV)

Yunnan, Inner Mongolia, Hunan, Hainan

Production of comics and animations (limited to cooperative JV)

Sichuan, Jiangxi, Heilongjiang, Anhui

 Industrial products

Production of semiconductor lighting materials

Sichuan, Jiangxi, Anhui, Chongqing

Research and production of aluminum and magnesium alloy

Chongqing, Ningxia, Henan, Guizhou, Shanxi, Liaoning

Production and application of Industrial gas

Chongqing, Shaanxi, Anhui

Production of photovoltaic and silicon materials

Inner Mongolia, Heilongjiang, Xinjiang

Production of abrasive materials, tools, and digital control machines and servomotor and drive device

Shaanxi, Shanxi, Ningxia, Hubei, Henan, Gansu

Heavy-duty machinery

Sichuan, Hunan, Henan, Guizhou, Guangxi

 Light industry

Processing and production of high-grade cotton, fur, hemp, silk, and chemical fiber

Yunnan, Xinjiang, Sichuan, Shaanxi, Shanxi, Hubei, Henan, Guizhou

 Natural Resources

Processing of nonferrous metals (limited to equity and cooperative joint-ventures)

Ningxia, Shaanxi, Qinghai, Shanxi, Guangxi, Henan

Use of imported natural resources

Jiangxi, Heilongjiang, Sichuan

Development of coal-bed gas and other coal resources.

Shanxi, Inner Mongolia, Henan

Production of large energy storage equipment

Sichuan, Inner Mongolia, Liaoning

 New Energy

Bio-fuel manufacturing (with Chinese majority ownership)

Yunnan, Guangxi, Anhui

Manufacturing of solar power generation devices and parts

Chongqing, Sichuan, Inner Mongolia, Jiangxi, Guizhou, Shaanxi

 Pharmacy

Development, protection and sustainable use of plant and animal medicine (excluding those restricted
or prohibited by the Catalogue Guiding Foreign Investment)

Sichuan, Yunnan, Shaanxi, Jilin, Inner Mongolia, Hubei, Guizhou

Development and production of medical equipment and key components and parts

Jilin, Liaoning, Jiangxi, Anhui

 Public services

Construction and operation of urban gas, heat, and water supply and drainage systems (Cities with population larger than 500,000 require Chinese majority control)

All provinces

Construction of logistics systems

Sichuan, Chongqing, Tibet

Health and senior care services

All provinces

 Telecom

Broadband services and value-added telecommunications business (under  China’s World Trade Organization commitments)

All provinces

 Transport

Highway transportation companies

All provinces except Liaoning

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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