China Unveils 20 Measures to Further Open up

the Economy to Foreign Investment

By Kelvin Lee, PwC Tianjin

Highlights of the 20 Measures

Expanding access to services sector, manufacturing sector, mining sector, etc. for foreign capital with different extent

To reflect the different extent in the opening-up to foreign capital for various sectors, words such as "loosen", "lift", "promote" and "cancel" are respectively adopted for different sectors in Circular 5.

Specifically, it is stated that access restrictions on foreign investment in the finance sector, securities sector, insurance sector and mining sector will be loosened; access restrictions on foreign investment in accounting and auditing, architectural design, rating services, etc. will be lifted; access restrictions on foreign investment in some manufacturing sectors will be cancelled; and access restrictions on foreign investment in telecommunications, Internet, culture, education, transportation and some other sectors will be promoted.

All along, some sectors such as finance, telecommunications, Internet, culture, education, transportation, etc. are very much monopolized in China which impedes foreign enterprises and private enterprises from entering into the market. Particularly the telecommunications, Internet and culture sectors are also subject to Chinese government's administration on propaganda and public opinion. In this regard, we believe that the competent authorities will not open-up these monopolized sectors in one go and instead they will adopt a relatively cautious and slow pace to gradually remove access restrictions. We can see from the discussion draft of The Catalogue for the Guidance of Foreign Investment Industries (the Foreign Investment Catalogue) issued in December 2016 that there are not many changes in access restrictions on foreign investment in the finance sector, securities sector, insurance sector, telecommunication, etc.

As compared to the measures relating to the opening-up of foreign investment in monopolized sectors, there is more to expect in respect of lifting access restrictions on foreign investment in accounting, auditing, architectural design and rating services sectors and cancelling access restrictions on foreign investment in some industries within the manufacturing sector. We have seen that China has already included the opening-up measures of these sectors into the discussion draft of the Foreign Investment Catalogue. Among it, access restrictions on foreign investment are cancelled for motorcycle manufacturing, fuel ethanol production, and manufacturing of rail transportation equipment. In addition, access restrictions on foreign investment in accounting and auditing, credit investigation and rating services are also deleted. Foreign investment will be allowed to enter into those sectors once the official Foreign Investment Catalogue is released.

Promoting equal treatment and fair competition between domestic enterprises and foreign investment enterprises (FIEs)

"To promote equal treatment and create fair competition environment between domestic enterprises and FIEs" is another highlight of the 20 Measures. There are 7 measures in this area. These measures not only emphasize the investment environment for the pre-entrance phase but also for the after-entrance phase so as to promote fair competition between domestic enterprises and FIEs and also to provide protection under the system to ensure that foreign investment will be able to receive fair treatment in China.

The fair competition review system, put forward in the 8th measure, was introduced for the first time in policies related to foreign investment. The system requires all levels of governmental departments to implement policies in a consistent way and forbids those departments to set restrictions on FIEs arbitrarily. The system is to ensure that policies to be released are stable, predictable and transparent. The detailed requirements of this system can be referred to in the Opinions of the State Council on Establishing the Fair Competition Review System in the Development of the Market System (Guofa [2016] No.34).

Moreover, these 20 Measures also put forward fair examination of business licenses and qualification applications of FIEs, fair participation in the standardization of work, fair participation in government procurement, fair protection of intellectual property rights, fair financing channels and conditions and fair registering capital system. It shows that equal treatments and fair competition between domestic enterprises and FIEs will become a basic principle in policy formulation and implementation in future.

Other highlights of the 20 Measures

Local preferential treatments to attract investment bounce back?

In recent years, some local governments have offered preferential land policies as well as fiscal incentives with an aim to promote regional economic development and encourage enterprises to establish at their location. Although these incentives have to a certain extent increased the regional economic growth, this could damage the fair market competitive environment at the national level. In December 2014, the State Council issued Guofa [2014] No. 62 (Circular 62) to clean-up these illegal fiscal policies in a comprehensive manner. Since then, the traditional way of providing incentives and preferential policies to attract investment no longer has any competitive advantages.

Now, Circular 5 explicitly allows local governments to grant preferential treatments within their statutory authority to support projects which would contribute greatly to employment, economic development and technology innovation and reduce investment and operating costs of enterprises investing in these projects. It is the first time that granting of preferential policies by local governments within their statutory authority to attract investment is being clarified since the release of Circular 62. Although this reflects that China encourages local governments to attract investment, preferential fiscal policies of local governments still need to be formulated based on relevant laws and regulations and approved by the corresponding departments. In this regard, how Circular 5 will positively impact local preferential policies in attracting investment remains to be seen.

Incentives for FIEs migrating to central and western regions and northeast regions

Circular 5 encourages foreign investors to migrate their business to central and western regions and northeast regions. It also clarifies that those FIEs satisfying certain criteria can enjoy financial subsidies and preferential land policies available under industrial migration and processing trade granted by the state. Moreover, those qualified FIEs which are also included in Preferential Industry Catalogue for Foreign Investment in Central and Western Regions (the Central and Western Catalogue) can enjoy reduced corporate income tax rate of 15%.

The discussion draft of Central and Western Catalogue further expands the scope of eligible foreign investment industries and has been released online to solicit public opinions. The official version is expected to be released soon. The Western Development Plan in the 13th Five-Year and the Revitalization of the Northeast Plan in the 13th Five-Year released by National Development and Reform Commission (NDRC) recently also mentioned the detailed arrangement for industry migration. Since there are certain incentives offered in these two regions, FIEs can study the detailed plan for industry migration and the eligible criteria in order to select a region to make investment.

Convenience for foreign talents to start business in China

Under the wave of entrepreneurship and innovation led by technology development, Circular 5 offers convenience and protection for foreign talents to start business in China. The 7th measure clarifies that high-level foreign talents who hold a Permanent Residence Permit for Foreigners and have established a scientific and technological enterprise are afforded the same treatment given to Chinese citizens. High-level foreign talents and their family members can enjoy the convenience stipulated in laws and regulations in applying for visas. In recent years, in order to encourage foreign talents to start business and settle down in China, more and more localities have provided facilitation measures in terms of employment and residence permits. For instance, the Regulations Governing the Implementation of the Series of Entry and Exit Policies of the Shanghai Science Technology Innovation Centre issued in July 2015 has provided a simplified and expedited process for overseas talents working for Shanghai science and technology enterprises or planning to invest or start an innovative business in Shanghai to apply for visa etcâ€Ã‚¦

The takeaway

With the new trend of China's economy and global industry migration, the introduction of 20 Measures provides a more open and clear policy direction to FIEs and reflects the active attitude of Chinese government in welcoming foreign investors. According to the statistics, although China's overall scale of utilizing foreign investment in 2016 was flat as compared with that in 2015, the structure of foreign investment utilisation in 2016 was more optimized. Such optimization is reflected as follows: foreign investment in the service industry has increased by 8%; although the overall foreign investment in the manufacturing industry has dropped, however foreign investment in high-tech manufacturing has increased by 3.6%1. This growth is in line with China's goal of attracting foreign investment in high-tech manufacturing and modern service. Overall, China is on the right track in utilising foreign investment.

In recent years, China has been continuously carrying out reforms on foreign investment administration aiming to provide a fair and convenient investment environment. For example, in October 2016, the National People's Congress Standing Committee approved amendments to four laws related to foreign investment and adopted the "pre-establishment national treatment plus negative list" administration model on the establishment and alternation of FIEs (including enterprises invested by Hong Kong, Macao and Taiwan investors) nationwide by replacing case-by-case approval with the record filing system. It greatly simplifies the administrative procedures for foreign investments in China, motivates foreign investors and saves the cost of establishment and operation. In addition, reforming the forex settlement of FIEs, allowing multinational companies to set up cash pooling in RMB and foreign currency and revising the Foreign Investment Catalogue are all measures aiming to enhance the utilisation of foreign investment.

In future, the mechanism of interim and post administration will be more frequently adopted in foreign investment administration. Currently the Ministry of Commerce has deployed a new comprehensive information system to administer matters relating to FIEs. The new comprehensive administrative information system for FIEs is comprised of 5 modules including FIEs' establishment and alteration record-filing system, FIEs' establishment and alteration approval system, FIEs' credit record system, FIEs' information disclosure system and FIEs' annual joint business report system. The change to interim and post-establishment supervision and establishment of new comprehensive administrative information system will bring along much stricter compliance requirements for FIEs.

Most of the 20 Measures mentioned in Circular 5 are directional and instructional. To what extent these measures will be implemented and how fast they could be implemented remains to be further clarified in the follow-up policies to be released by relevant governmental departments.

For foreign investors, in addition to paying attention to the follow-up detailed rules and revised versions of Foreign Investment Catalogue and Central and Western Catalogue, we also recommend them to study the relevant planning of the 13th Five-Year Plan at both state and local level in order to grasp the industry's development and seek new opportunities. Furthermore, especially for the relaxation of access restriction for some sectors, foreign investors which are interested in investing in these sectors can contact the relevant governmental departments through their affiliates or intermediary agents in China so as to pursue such opportunities. We will keep an eye on the development of follow-up policies relating to foreign investment and share our observation with you in a timely manner.

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