China announces new initiatives to liberalise markets and attract investment

China’s State Council published a new 20-point plan on 17 January 2017, to provide assurances that government authorities will step up the pace of regulatory reform to liberalise various sectors of the Chinese economy, improve the investment environment in China and raise the attractiveness of foreign direct investment in China.

The plan covers a broad range of topics relevant to foreign investment in most sectors in China. Its objectives appear to be to stem the decline in foreign direct investment in China and avoid a possible exodus of foreign investment from China, by re-emphasising China’s strengths as a destination for inbound investment.

Key points of the plan include:

Market opening initiatives
  • Foreign Investment Catalogue: The plan indicates that future relaxation of foreign investment restrictions will be tied to the revision of the Foreign Investment Industrial Guidance Catalogue, a draft of which was published for public comment in December (see our earlier alert). Several sections of the draft, containing proposed relaxations, are re-emphasised in the plan. These include shale oil, shale gas, oil sands and other non-conventional oil and gas resources, rail transport equipment and fuel ethanol production.
  • Finance and other sectors: Encouragingly, the plan points to a relaxation of restrictions in sectors not covered by the current proposed revisions to the Catalogue, including banking financial institutions, securities, fund management, futures, insurance, insurance agency and certain professional services. The process of obtaining regulatory approval in co-operative projects between Chinese and foreign partners in the petroleum and natural gas sectors is to be replaced by a more straightforward filing procedure.
  • R&D: Foreign investment in research and development (R&D) is to be encouraged by opening up projects under the national technology plan to foreign investors, and enabling them to obtain tax deductions on R&D expenses, incentives to invest in high-technology enterprises and R&D centres, on an equal footing with domestic investors.
  • Infrastructure: In infrastructure, the plan encourages foreign investment in energy, transport, water, environmental and public services projects, with investments on a concession basis and investments on a construction and operation basis benefiting equally.
Business environment reforms
  • Procurement: The plan directs the Ministry of Finance to ensure that government bodies extend equal treatment to domestic manufacturers and foreign invested enterprises (FIEs) competing for Chinese government tenders. This may go some way towards addressing the concerns of foreign investors, and their chambers of commerce, of FIEs encountering discrimination in public procurement in China.
  • Licensing: In the regulation of foreign investment, the plan aims to create more transparency and certainty by requiring government ministries to ensure that FIEs applying for business permits and qualifications in China are subject to the same standards, requirements and timeframes as domestic enterprises, except where expressly required under laws and regulations, or provision of additional information by the foreign investor is necessary.
  • Fundraising: The plan contemplates FIEs issuing corporate bonds, convertible bonds and enterprise bonds and non-financial debt instruments in China and listing on China’s onshore exchanges, creating new fundraising opportunities in these markets.
  • No discriminatory policies: From an overall perspective, the plan seeks to ensure a fair business environment for foreign investors by requiring all foreign investment policies of government ministries to comply with the State Council’s June 2016 fair competition review opinion. This prohibits policy-makers from setting rules which discriminate against foreign investors, including discriminatory pricing and import/export restrictions on foreign manufactured goods.
Incentive policies

The plan marks out several key areas to watch for further incentives to foreign investors. Points touched upon include: government financial, land and personnel migration incentives to invest in central, western and north-east China; new liberalisation in these regions from the impending revision of the Catalogue of Priority Industries for Foreign Investment in Central and Western China; and reforms facilitating the borrowing of offshore debt by FIEs.

Continuity with the existing policies of continued reform of the foreign investment regulatory process through the negative list system (see our earlier alert) and further development of the free trade zones is another encouraging feature of the plan.

Overall assessment

The new plan will be of interest to foreign investors who are in the process of planning investments in the financial and other sectors touched upon by the plan, and provides certain comfort to market players with committed investments in China who are concerned about deterioration of the investment environment in China.

The State Council’s role as initiator of the plan from the highest level of government and co-ordinator of its implementation among the different ministries is encouraging. However, its brevity and lack of a definite timeframe show that an extensive effort on the part of the authorities in following through by issuing, and implementing, detailed rules is required if its broad principles are to be achieved. It remains to be seen how the proposals are followed through after the Chinese New Year and beyond.

References

Notice of the State Council on Several Measures to Increase Openness and Proactively Utilise Foreign Investment (国务院关于扩大对外开放积极利用外资若干措施的通知), 17 January 2017

Notice of the National Development and Reform Commission and Ministry of Commerce Seeking Public Comment on the Revised Draft Foreign Investment Industrial Guidance Catalogue (国家发展改革委 商务部关于《外商投资产业指导目录》修订稿公开征求意见的公告), 7 December 2016

Notice of the National Development and Reform Commission Seeking Public Comment on the Revised Draft Catalogue of Priority Industries for Foreign Investment in Central and Western China (关于《中西部地区外商投资优势产业目录》修订稿公开征求意见的公告), 14 September 2016

Opinions of the State Council on Establishing a Fair Competition Review System in the Development of the Market System (国务院关于在市场体系建设中建立公平竞争审查制度的意见), 1 June 2016