China took steps earlier this year to attract more foreign investment by opening up more sectors of the economy, creating more even treatment between domestic and foreign companies, and giving more incentives to those investing in the central and northwestern regions. While these initiatives were welcomed at the time, lawyers say that foreign investors still face challenges such as a lack of clarity about how procedures for local government approval work and restrictions on money leaving the country.
China’s Ministry of Commerce (MOFCOM) says foreign direct investment grew by 4.1% in 2016, with Hong Kong, Singapore, South Korea, Macau and US being the top jurisdictions for amount of investment. Despite the growth, the State Council announced new measures in January to attract foreign investment against the backdrop of increasing production costs in China compared to emerging markets, dwindling foreign exchange reserves and trade protectionist moves from countries such as the US.
Measures to encourage investment
The State Council’s notice contains 20 measures divided into three chapters:
- Restrictions on market access lifted for foreign firms investing in services (including banking-type financial institutions; securities, futures and insurance companies; accounting and auditing and credit rating firms), manufacturing (including railway transportation equipment, motor vehicles, ethanol fuel, oil and fat processing, environmentally friendly manufacturing) and mining (including oil shale, oil sand, shale gas and mineral resources)
- Maintaining fair competition between foreign and domestic companies, including eliminating registered capital requirement for foreign firms, creating a more fair environment for foreign companies in public bidding processes and creating more financing channels for foreign businesses such as through listings and bond issuances
- Attracting investment into the central and northeastern parts of China, including preferential tax, land rents and financing
Concerns still remain
The restrictions on specific sectors will be lifted through changes to the Catalogue for the Guidance of Foreign Investment Industries; however, it is unclear how thorough the changes will be. Businesses are also concerned about remitting funds out of the country with the curbs on capital outflows and unclear approval processes at the local level.
“The policies are more favourable and they offer more simplified procedures and preferential financing treatment for foreign entities,” says Yongqing Huang, partner at Jingtian & Gongcheng. “But foreign investors pursuing business opportunities should be aware of implementation risk, especially in how the local government and branch offices may encourage local protectionism.”
“Other measures that have been seen recently are the China Banking Regulatory Commission’s implementation notice to lower the threshold for the foreign financial industry to conduct financial activities such as issuing bonds. The government is also making it easier for foreign employees to get a PRC work permit. Foreign companies in the favoured industries can benefit from lower land use price, up to a discount of 30% of the land index price,” says Eric Chen, partner at Dentons. China has also made announcements to allow foreign firms to issue bonds and be allowed to list on China’s stock exchanges.
Under China’s foreign investment law, which was changed in October 2016, foreign invested entities have moved from a system that requires MOFCOM approval to one that requires simple registration unless the industry falls under the national negative list. “Foreign investors can benefit from investments in value-added industries and can get shareholder structuring of up to 50% foreign investment, but local governments may still be reluctant to grant approvals,” adds Huang. Those in the central and western regions and in the free trade zones will be able to take advantage of preferential policies for targeted sectors.
“Local governments will have their own policies to promote investment and in the more remote areas in the mid-West, the development status is different,” says Chen. “The second and third tier cities’ legal and approval frameworks are not very transparent, so businesses really need to do their due diligence and know the local rules. While those in the free trade zones can enjoy fast track approval processes, each free trade zone is different and the experience is difficult to replicate.”
“In practice, local governments may put a hold on certain policies if they see issues, for example on foreign exchange,” says Huang. “It is easier to deal with wiring funds for exchange offshore if the business is established but it is still difficult if for high value transactions. Businesses need to go through a Chinese bank and use its offshore branch to do the exchange.”
“With China’s foreign currency crash, the government has put in tight controls on money going out,” says Chen. “But for multinational companies and those with strong financial capabilities, the process is easier.”
If it wants to bring in more investment from overseas, China will need concrete measures to reassure existing and potential investors that capital flows are not overly restricted and clear local legal frameworks are in place. While the liberalisation of the capital markets to foreign firms and investors is something to look forward to, clear regulation is needed to ensure confidence in the markets.