China Introduces Sweeping FDI Reforms

[Raphael]

china-briefing.com/news/2014/11/07/revised-guidance-catalogue-china-introduces-sweeping-fdi-reforms.html

SHANGHAI—On November 4, the Chinese government released the latest update to the “Catalogue for the Guidance of Foreign Investment Industries,” outlining which industries shall be encouraged, restricted or prohibited for foreign investment. A draft of the revised list has been released for public commentary and will be officially implemented on 3 December.

Inclusion on the list of encouraged industries is often coupled with the easing of restrictions on foreign investment, such as the ability to operate as a wholly foreign-owned enterprise (WFOE) rather than being restricted to a Sino-foreign joint venture (JV). The revised Catalogue newly permits WFOEs in the following industries:

Traditional Chinese medicine
Oil field exploration and development
Automobile parts
Aircraft engines and components
Vessel engines and components
Equipment manufacturing for air traffic control systems
Accounting and auditing
Meanwhile, foreign investors will soon be allowed to act as the controlling shareholder in JVs engaged in the following industries:

Manufacturing of ground-based and water-based aircraft
Design and manufacture of vessel cabin machinery
Design and manufacture of civil satellites
Construction, maintenance and operation of railways
International sea transportation
Operation of performance venues
Overall, the 2014 Guidelines are set to lift restrictions on foreign investments across a wide array of sectors, with the number of restricted items more than halved, from 79 to 35. Here we provide a summary of the major changes compared to the 2012 Guidelines. For more details on how your business may be specifically affected, please contact us at china@dezshira.com.

For starters, most restrictions on the mining industry shall be lifted, with only the mining of special and rare types of coal, lithium, granite and precious metals being restricted to investment with a Chinese controlling partner. The previous prohibition on foreign investment in the rolling and smelting of non-ferrous metals will be removed as well.

Nearly all restrictions on manufacturing are to be withdrawn as well, the only major exceptions being the processing of edible oils and fats, production of biological fuels (e.g. ethanol), smelting of rare metals and rare earth elements, and the manufacture and repair of vessels. Prior to these changes, foreign investment in the production of numerous types of batteries was forbidden, as was any investment into traditional Chinese tea – both of which will now be open to investment.

Investment in the finance industry is also to be considerably liberalized. There will no longer be limitations on foreign investment in finance companies, trust companies, currency brokerages and insurance brokerages. Foreign investment in banks would now be allowed as well, provided that no single financial institution or entity controlled by such an institution may control over 20 percent ownership of a Chinese commercial bank. Furthermore, foreign financial institutions combined may not own more than 25 percent of the shares of any bank. Lastly, only foreign banks (rather than other types of foreign companies) may invest in rural commercial banks.

Restrictions on investing in securities companies are to be eased as well. Foreign investors will now be allowed to invest in securities companies underwriting and sponsoring RMB-denominated ordinary shares, foreign shares, government bonds, corporate bonds, as well as brokering foreign shares, government bonds and corporate bonds. The limit of shares a foreign entity may own in such a company has also been raised from one-third to 49 percent.

The real estate sector is now set to fully open to foreign investment, with previous restrictions like those on land development, and the construction of offices, high-end hotels and real estate brokerages to be fully lifted. So too with limitations on building and operating movie theaters, theme parks, recreation venues and power grids.

However, several new constraints have been added to the list. One that stands out is a new restriction on the manufacture of motor vehicles. In any JV producing vehicles, the Chinese party must now own over 50 percent of shares. Furthermore, such companies may only engage in up to two of the following three sectors: passenger vehicles, work-related commercial use vehicles (such as trucks or vehicles used in construction) and motorcycles. The latter restriction shall not apply where the third category is added via a merger or acquisition undertaken by the Chinese party.

Limitations shall also be extended to health care and education. Hospitals must now have a Chinese party as the majority shareholder. The same applies to pre-school and tertiary education.

The 2014 Guidelines also introduce several new prohibitions on foreign investment. These extend to the production of genetically modified plant seeds, processing of petroleum and coking, processing and production of nuclear fuel, sale of tobacco, Chinese legal consulting (restraints on non-Chinese legal consulting, however, have been completely lifted) and the operation of antique stores and auction houses selling Chinese cultural relics.

Lastly, with this document the Chinese government intends to tighten control on viewing flights over China and aerial photography, and several activities related to geographical surveying and mapping.

 

[Chinese-Dragon]

For starters, most restrictions on the mining industry shall be lifted, with only the mining of special and rare types of coal, lithium, granite and precious metals being restricted to investment with a Chinese controlling partner. The previous prohibition on foreign investment in the rolling and smelting of non-ferrous metals will be removed as well.

Nearly all restrictions on manufacturing are to be withdrawn as well, the only major exceptions being the processing of edible oils and fats, production of biological fuels (e.g. ethanol), smelting of rare metals and rare earth elements, and the manufacture and repair of vessels. Prior to these changes, foreign investment in the production of numerous types of batteries was forbidden, as was any investment into traditional Chinese tea – both of which will now be open to investment.

Investment in the finance industry is also to be considerably liberalized. There will no longer be limitations on foreign investment in finance companies, trust companies, currency brokerages and insurance brokerages.

This is only a very small part of our overall economic reform plan, but a interesting part nonetheless.

 

[bolo]

Investment in the finance industry is also to be considerably liberalized. There will no longer be limitations on foreign investment in finance companies, trust companies, currency brokerages and insurance brokerages. Foreign investment in banks would now be allowed as well, provided that no single financial institution or entity controlled by such an institution may control over 20 percent ownership of a Chinese commercial bank. Furthermore, foreign financial institutions combined may not own more than 25 percent of the shares of any bank. Lastly, only foreign banks (rather than other types of foreign companies) may invest in rural commercial banks.

My worse fear for China is becoming reality.

 

[FairAndUnbiased]

So that means more foreign owned companies will be here to devastate Chinese social and physical environment while sending profits back overseas. Lol at the people cheering for this. Just more sheep.

 

[Chinese-Dragon]

So that means more foreign owned companies will be here to devastate Chinese social and physical environment while sending profits back overseas. Lol at the people cheering for this. Just more sheep.

If the Chinese government is allowing this, that means they believe our domestic industries are strong enough in various sectors to be able to handle foreign competition on their own.

That's why they only did it for specific sectors. We are a developing country so we can still protect some other sectors.

And pushing through economic reforms is absolutely essential to sustaining our growth.

 

[somebozo]

China enters the capitalism age!

 

[殷永峰]

Rational look at anything, intelligent analysis, don't discredit any country.Rational return card

 

[FairAndUnbiased]

If the Chinese government is allowing this, that means they believe our domestic industries are strong enough in various sectors to be able to handle foreign competition on their own.

That's why they only did it for specific sectors. We are a developing country so we can still protect some other sectors.

And pushing through economic reforms is absolutely essential to sustaining our growth.

What company voluntarily welcomes competition? None. It is in the interest of every company to maintain a monopolistic position in the market. All companies share a single goal: elimination of all competitors and becoming the sole provider of a good or service. Otherwise, there is no reason to increase market share. If increasing market share is good, then the obvious conclusion is that the best market share is 100%.

If you agree with that, and you agree with the assumption that it is better for Chinese companies to be in such positions rather than foreign companies, then this is a stupid move that will inevitably reduce Chinese company market share.

 

[Chinese-Dragon]

What company voluntarily welcomes competition? None. It is in the interest of every company to maintain a monopolistic position in the market. All companies share a single goal: elimination of all competitors and becoming the sole provider of a good or service. Otherwise, there is no reason to increase market share. If increasing market share is good, then the obvious conclusion is that the best market share is 100%.

If you agree with that, and you agree with the assumption that it is better for Chinese companies to be in such positions rather than foreign companies, then this is a stupid move that will inevitably reduce Chinese company market share.

Without competition, companies will become inefficient. Which is bad for our overall economic growth, and thus bad for the people.

Even ICBC, the largest company in the entire world, does not have 100% market share in our domestic market. Nowhere close.

Because that leads to inefficiency. There is a reason why monopolies are a classic example of market failure.

The Chinese government is not stupid, they understand economics just as well (or maybe better) than many other governments.

 

[thesolar65]

!!

 

[tranquilium]

What company voluntarily welcomes competition? None. It is in the interest of every company to maintain a monopolistic position in the market. All companies share a single goal: elimination of all competitors and becoming the sole provider of a good or service. Otherwise, there is no reason to increase market share. If increasing market share is good, then the obvious conclusion is that the best market share is 100%.

If you agree with that, and you agree with the assumption that it is better for Chinese companies to be in such positions rather than foreign companies, then this is a stupid move that will inevitably reduce Chinese company market share.

Eh, companies doesn't like competition for sure. It doesn't necessarily mean the country share the same opinion.

All I am going to say is that we should wait and observe the effects of the reform. It certainly is proposing to introduce some new elements into the Chinese economy, whether it works or not, only time will tell.

 

[Keel]

The automobile industry is a classic reflection of how much damage foreign investments have done to our own industry by opening up.
We are likely working under immense pressure due to WTO agreements so the announcement of these drastic stupid rules
We are not ready yet, not to this extent despite year on year favourable trade balances
We should have a provisional period like 10 year to try out the effect before jumping over the cliff without keeping an emergency parachute inside of our backpack

 

[Aepsilons]

china-briefing.com/news/2014/11/07/revised-guidance-catalogue-china-introduces-sweeping-fdi-reforms.html

SHANGHAI—On November 4, the Chinese government released the latest update to the “Catalogue for the Guidance of Foreign Investment Industries,” outlining which industries shall be encouraged, restricted or prohibited for foreign investment. A draft of the revised list has been released for public commentary and will be officially implemented on 3 December.

Inclusion on the list of encouraged industries is often coupled with the easing of restrictions on foreign investment, such as the ability to operate as a wholly foreign-owned enterprise (WFOE) rather than being restricted to a Sino-foreign joint venture (JV). The revised Catalogue newly permits WFOEs in the following industries:

Traditional Chinese medicine
Oil field exploration and development
Automobile parts
Aircraft engines and components
Vessel engines and components
Equipment manufacturing for air traffic control systems
Accounting and auditing
Meanwhile, foreign investors will soon be allowed to act as the controlling shareholder in JVs engaged in the following industries:

Manufacturing of ground-based and water-based aircraft
Design and manufacture of vessel cabin machinery
Design and manufacture of civil satellites
Construction, maintenance and operation of railways
International sea transportation
Operation of performance venues
Overall, the 2014 Guidelines are set to lift restrictions on foreign investments across a wide array of sectors, with the number of restricted items more than halved, from 79 to 35. Here we provide a summary of the major changes compared to the 2012 Guidelines. For more details on how your business may be specifically affected, please contact us at china@dezshira.com.

For starters, most restrictions on the mining industry shall be lifted, with only the mining of special and rare types of coal, lithium, granite and precious metals being restricted to investment with a Chinese controlling partner. The previous prohibition on foreign investment in the rolling and smelting of non-ferrous metals will be removed as well.

Nearly all restrictions on manufacturing are to be withdrawn as well, the only major exceptions being the processing of edible oils and fats, production of biological fuels (e.g. ethanol), smelting of rare metals and rare earth elements, and the manufacture and repair of vessels. Prior to these changes, foreign investment in the production of numerous types of batteries was forbidden, as was any investment into traditional Chinese tea – both of which will now be open to investment.

Investment in the finance industry is also to be considerably liberalized. There will no longer be limitations on foreign investment in finance companies, trust companies, currency brokerages and insurance brokerages. Foreign investment in banks would now be allowed as well, provided that no single financial institution or entity controlled by such an institution may control over 20 percent ownership of a Chinese commercial bank. Furthermore, foreign financial institutions combined may not own more than 25 percent of the shares of any bank. Lastly, only foreign banks (rather than other types of foreign companies) may invest in rural commercial banks.

Restrictions on investing in securities companies are to be eased as well. Foreign investors will now be allowed to invest in securities companies underwriting and sponsoring RMB-denominated ordinary shares, foreign shares, government bonds, corporate bonds, as well as brokering foreign shares, government bonds and corporate bonds. The limit of shares a foreign entity may own in such a company has also been raised from one-third to 49 percent.

The real estate sector is now set to fully open to foreign investment, with previous restrictions like those on land development, and the construction of offices, high-end hotels and real estate brokerages to be fully lifted. So too with limitations on building and operating movie theaters, theme parks, recreation venues and power grids.

However, several new constraints have been added to the list. One that stands out is a new restriction on the manufacture of motor vehicles. In any JV producing vehicles, the Chinese party must now own over 50 percent of shares. Furthermore, such companies may only engage in up to two of the following three sectors: passenger vehicles, work-related commercial use vehicles (such as trucks or vehicles used in construction) and motorcycles. The latter restriction shall not apply where the third category is added via a merger or acquisition undertaken by the Chinese party.

Limitations shall also be extended to health care and education. Hospitals must now have a Chinese party as the majority shareholder. The same applies to pre-school and tertiary education.

The 2014 Guidelines also introduce several new prohibitions on foreign investment. These extend to the production of genetically modified plant seeds, processing of petroleum and coking, processing and production of nuclear fuel, sale of tobacco, Chinese legal consulting (restraints on non-Chinese legal consulting, however, have been completely lifted) and the operation of antique stores and auction houses selling Chinese cultural relics.

Lastly, with this document the Chinese government intends to tighten control on viewing flights over China and aerial photography, and several activities related to geographical surveying and mapping.

A welcome move by the Chinese Government's part. I'll drink to this!

 

[FairAndUnbiased]

Without competition, companies will become inefficient. Which is bad for our overall economic growth, and thus bad for the people.

Even ICBC, the largest company in the entire world, does not have 100% market share in our domestic market. Nowhere close.

Because that leads to inefficiency. There is a reason why monopolies are a classic example of market failure.

The Chinese government is not stupid, they understand economics just as well (or maybe better) than many other governments.

No, in many cases, competition leads to inefficiency and duplication. Why do power companies not build competing power lines? Why do telecom companies not produce competing fiber optics lines? Why do water companies not build competing water mains? Because that's inefficient - instead, they're usually geographic monopolies.

This is another example of duplication and inefficiency. Why invite foreign companies to compete with Chinese ones, if the Chinese ones are 1.) already competing against each other to insure efficiency and 2.) adding more competitors will create duplication and waste?

 

[Chinese-Dragon]

No, in many cases, competition leads to inefficiency and duplication. Why do power companies not build competing power lines? Why do telecom companies not produce competing fiber optics lines? Why do water companies not build competing water mains? Because that's inefficient - instead, they're usually geographic monopolies.

This is another example of duplication and inefficiency. Why invite foreign companies to compete with Chinese ones, if the Chinese ones are 1.) already competing against each other to insure efficiency and 2.) adding more competitors will create duplication and waste?

How do you become a world champion if you only compete with yourself?

Our Olympic champions compete with the best in the world, and in many cases beat them.

Our Private companies like Lenovo and Haier are now the number 1 in the entire world in their respective markets. And once Lenovo acquires half of HP, they will have something like 40% of the global market share.

Our State-owned companies have now taken the top 3 positions in the rankings of the largest companies in the world (as per Forbes). ICBC is the largest company in the world.

The World’s Biggest Public Companies - Forbes

Chinese companies will become powerful by competing with, and beating foreign companies. It will be easier in the Chinese domestic market, since they know the market better than anyone else. Google once had a 29% market share in China (in 2010), but Baidu took them on in Chinese-language search and won. Now Google's market share in China is only 1.5%, as of 2013.

You think we can't compete? That's what foreigners tend to think, and they always get surprised when we beat them. We have the largest manufacturing base in the world, and we are the largest exporters in the world. How? We took on and beat the competition. People can choose to import products from anywhere in the world, and they choose China. Because we beat them where it counts, in terms of efficiency.

We are still a developing country yes, and thus some sectors still need to be protected. But the Chinese government is the one best placed to decide which sectors to protect, and which sectors to open up. And frankly I trust their judgement a lot more than some naysayers on the internet.