As a reaction to China's accession to the World Trade Organization, new regulations have been introduced broadly classifying the projects in which foreign sponsors may or may not invest. The projects are listed in four categories: encouraged, permitted, restricted and prohibited. The new legislation appears in the Provisional Regulations for Guiding the Direction of Foreign Investment, and the Catalogue for Guiding Foreign Investment in Industries, effective from April 1 2002. These replace similar regulations dating from 1995 and 1997 respectively.
In essence, the regulations stipulate the basic principles under which foreign investments are classified and the catalogue spells out the specific categorization of each kind of investment project falling under the encouraged, restricted and prohibited categories. Projects not falling within these three categories are deemed to fall under the permitted category.
Projects falling into the encouraged category include those dealing with:
- new agricultural technologies, integrated agricultural development, energy, transportation and important raw materials;
- new and advanced technologies, advanced applicable technologies, and new equipment and materials that improve product performance, technological and economic efficiency of enterprises, and those that are not capable of production by local enterprises;
- market demands, emerging markets, or enhanced international competitiveness;
- new equipment, that can save energy and raw materials, make better use of resources and renewable resources, and prevent or alleviate of pollution; and
- developing human resources and resource advantages in central and western China, and which are compatible with local industrial policies.
Encouraged projects enjoy preferential treatment such as exemption from customs duties and (to some extent) value-added tax for imported equipment. They can expand their business scope (with government approval) if they concern such aspects as energy, transportation and urban infrastructure construction demanding a vast amount of capital and a long return period. The regulations contain built-in measures restricting some types of projects (envisaged to be mainly restricted projects) to the use of investment vehicles that fulfil the following criteria:
- they are in the form of sino-foreign equity joint ventures or cooperative joint ventures;
- the Chinese party is the majority shareholder (ie the Chinese party holds not less than 51% of the total equity of the investment vehicle); or
- the Chinese party is the relative majority shareholder.
In other words, for these restricted projects, no wholly-foreign-owned enterprises will be allowed. The regulations' scope of application extends to investment projects launched by Chinese individuals living overseas, as well as investors from Hong Kong, Macau and Taiwan.