On November 4, 2014, the National Development and Reform Commission (“NDRC”) released the latest draft updating the current 2011 “Foreign Direct Investment Industries Guidance Catalogue (“2014 Draft”),” and called for public opinions on the draft until December 3, 2014.
The Foreign Direct Investment Industries Guidance Catalogue (“Catalogue”) is the central policy of the Chinese government that regulates the inflow of foreign investment in various Chinese industries. The Catalogue classifies foreign direct investments in the industrial sectors as “encouraged,” “restricted,” “permitted,” or “prohibited” and imposed restrictions on foreign investment forms and shareholdings on certain key industrial sectors. Since its inception in 1995, the Catalogue has been revised once every few years. The 2014 Draft, once takes into effect, will become the sixth revision and replaces the current 2011 Catalogue.
Since the resumed discussion between US and China on the Sino-US Bilateral Investment Treaty in July 2013, the topics of further liberation on Chinese industrial sectors and simplifying the government administrative approval procedures to foreign investments have attracted much attention. Under such pretext, in Sept. 2013, Shanghai Free Trade Zone (“FTZ”) initiative was launched and it bypassed the Catalogue by adopting the “negative list” approach which specified the industries in which foreign investment is either restricted or prohibited. When the 2013 Negative List was first introduced, it included virtually all of the restrictions and prohibitions on foreign investment set out in 2011 Catalogue thus disappointed many foreign investors. In response, 2014 Negative List, which introduced in June 2014, reduced the number of industries and activities that are restricted from 190 to 139. However, as many viewed 2014 Negative List, which is only applicable to FTZ, as a limited improvement over 2011 Catalogue, the public has been expecting greater degree of reform to be carried out by the Chinese government.
Then comes 2014 Draft, which promises to offer the most considerable changes to date. 2014 Draft proposes to reduce the number of “restricted” industrial sectors to foreign investors by more than halved, from 79 to 35, significantly cut the number of industrial sectors that currently limited to joint ventures and partnerships from 43 to 11 and decrease the numbers of industrial sectors that require a Chinese majority shareholder from 44 to 22.
The key changes in different major industrial sectors can be summarized as follows:
For accounting and auditing services which fall under the “encouraged” sector, 2014 Draft removes the “the form of cooperative joint ventures and/or partnership” requirement. This signifies that foreign investors are permitted to establish WFOEs to run accounting firms for provision of accounting and auditing related services in China.
Restrictions on entertainment industry are also liberalized. Under 2014 Draft, the operation of performance venues under the “encouraged” category no longer require Chinese majority shareholdings, while the construction and operation of large-scale theme parks and entertainment venues are now categorized as “permitted” activities.
However, services such as legal advice and auction of Chinese cultural relics are under tighter control. Under the current 2011 Catalogue, providing legal advice is categorized as “restricted”. In 2014 Draft, however, providing Chinese law related consulting services is explicitly listed as “prohibited”. In addition, operating auction houses selling Chinese cultural relics and antique stores is also explicitly listed as “prohibited” under 2014 Draft.
In general, 2014 Draft is further relaxed by lifting restrictions on foreign investments across a wide array of industries and business activities. At the same time it also indicates that we can expect to see a series of major reforms to the foreign investment regulatory regime in the foreseeable future.
p.s. Thinking about this further it should not really affect triple A as they actually take european antiques over to China to sell………