This content is from: Local Insights

Private investment encouraged

Jem LiNa Wang

On May 7 2010, China's State Council issued Opinions on Encouraging and Guiding the Healthy Development of Private Investments (the so-called New 36 Measures), under which private investment is encouraged in certain sectors, including infrastructure construction and operations (road and water transportation, civil airport, power and new energy, oil and gas, telecommunications, public facilities, policy-based housing), social affairs (medical and educational institutions, cultural, tourism and sport industries, financial institutions), trading (logistics, e-commerce) and national security related industry (R&D and manufacturing of products for military and civil uses) (the Opened Industries).

Before the New 36 Measures were issued, the Open Industries were not expressly closed to private investment, but in practice, many were monopolised by State-owned enterprises (SOEs). The SOEs enjoyed incomparable capital advantages and other preferential treatments. The China Financial Times reported that up to 2009, SOEs capital was permitted to enter 72 of 80 industries in China. Foreign capital has access to 62, while private Chinese capital has access to only 41.

The New 36 Measures encourage private Chinese investors to participate in the Opened Industries by equity investment or by equity participation in relevant SOEs which are in such industries.

The New 36 Measures suggest the following special policies (Preferential Policies) to private investors:

A. Preferential tax treatment;

B. Encouragement of outbound investment with financial sponsorship, facilitation of foreign exchange and customs procedures to the level currently enjoyed by SOEs;

C. Streamlining relevant regulations taking into account private investors' views and needs;

D. Government based financing and encouraging private companies to obtain financing from the stock and bond markets; and

E. Loosening market entry standards.

To implement the New 36 Measures the State Council on July 22 2010 issued a Circular on Dividing Key Tasks about Encouraging and Guiding the Healthy Development of Private Investment (the Circular). The Circular divides the New 36 Measures into 40 specific tasks, with each allocated to at least one governmental department. More than 20 governmental departments are involved. The regulation of private companies' access into each of the Opened Industries and the implementation of each of the Preferential Policies are allocated to specific government departments.

The New 36 Measures and the Circular have opened doors to private investors to participate in previously restricted areas. However, given the SOEs long standing monopoly positions and the absence of laws and procedures to guide government departments in giving approval to private companies, implementation of the New 36 Measures and the Circular will be the key challenge and success will depend on further efforts by the Chinese government.

More specific rules in respect of each specific Opened Industries and Preferential Policies are expected. In spite of the challenges ahead, the New 36 Measures are welcome news to non-Chinese investors, who now have opportunities to invest in potentially more profitable industries (if foreign investment is permitted) by a way of direct investment in the Opened Industries, or indirectly by investment in SOEs or other private Chinese companies, which are investing in the Opened Industries.

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