Foreign direct investment is considered to be of great importance in China: despite the impact of the crisis and its global consequences, during 2009 and 2010 the Asian power maintained its second place as the preferred destination for foreign investment, winning, at the end of 2011, an annual value of FDI around 110-120 billion dollars. The Catalog for Foreign Investments in China (Foreign Investment Industrial Guidance Catalogue) therefore represents a document of fundamental importance as a guideline for international companies that decide to invest in the country, involving both greenfield investments and indirect ones in the form of M&A.
Published for the first time in 1995, the legislation has undergone a series of changes (in 1997, 2002, 2004, 2007), the last of which ended with the publication of the new Catalog 2012 (however still only available in the original language) on 29 December 2011, the provisions of which entered into force at the end of January. The Catalog divides foreign investments into three categories: "favorites", "restricted" and "prohibited"; to these is added a fourth category of investments, the "permitted", which includes all the sectors to which explicit reference is not made within the three categories mentioned above, not subject to incentives, but not even to restrictions. In particular, "favored" investments are characterized by the possibility of reductions, or even exemptions, from local taxes, income taxes, import duties and VAT; investments that instead fall into the "restricted" category are often subject to restrictions on foreign ownership: obligation to associate with local partners (generally in the form of joint ventures) and maximum caps on the percentage of foreign participation that can be held.
In order to promote domestic development, greater openness of the economy and the creation of a favorable environment for foreign investment, the new Catalog reduces the items of the last two categories, while expanding the investment fields belonging to the "favorites" category . The new version makes some substantial changes to the previous one from 2007, which reflect the economic objectives that the Chinese government set out in the 12th Five Year Plan, 12-2011 and which the State Council expressed in the Opinions on the use of foreign capital (Several Opinions on Further Utilizing Foreign Capital). Attention is focused on the optimization and innovation of the Chinese industrial structure, leveraging especially on the development of strategic, high-tech and high value-added emerging industries, and on a greater use of alternative energies.
Among the key sectors added to the "favorites" category, there are above all those related to the development of energy efficient technologies, green industries and those engaged in pollution control. Great attention is also paid to industries that make use of advanced technologies for high-quality production, especially of textile material, chemicals, machinery and equipment, reflecting the Chinese government's willingness to promote the development and transformation of the traditional manufacturing industry. Incentives are also directed to human capital: in fact, institutions that deal with education and vocational training are included in the list of "favourite" investments. Investments in modern service industries are also encouraged, especially if aimed at improving the country's welfare. Finally, investment sectors involving venture capital firms and intellectual property service entities, such as patent and trademark consultancies and agents, were upgraded from “restricted” to “preferred” categories.
As regards the changes in the investment areas that the new Catalog does not contemplate, and which therefore fall into the implicit category of "allowed" investments, there is no shortage of innovations: in fact, many investment areas have been removed from the "restricted" item, first of all that pertaining to health institutions and the production of some medical devices (such as disposable injectors, blood transfusion tools, blood bags, etc.). In the financial and commercial sphere, although investments in financial institutions and the banking sector, including insurance companies, remain contemplated within the category of investments subject to restrictions, investments in financial leasing companies, commercial companies engaged in franchise, business management and consulting services. A certain easing of regulations on foreign investments has also been observed in the sphere of communications and information: foreign companies involved in the distribution of audio and video products are no longer required to be controlled by Chinese counterparts (although they remain subject to corporate form of joint venture); in the context of the provision of some basic services in the telecommunications sector, the maximum limit granted to foreign participation was raised from 35% to 49%; the importation and distribution of books, newspapers and magazines and the importation and production of audio/video products and electronic publications were also permitted (although publication per se is still prohibited). Finally, among the other investment areas that have been removed from the "restricted" category, there is the production of carbonated drinks (although the production of wine and spirits remains subject to restrictions).
Although most of the changes to the previous version of the Catalog have a positive imprint, in terms of investment opportunities and easing of regulations relating to areas previously subject to restrictions, some changes have nevertheless led to the addition of some items also to the within the “restricted” and “prohibited” investment lists. Among the most notable additions to the first of these categories are: the exploration and extraction of some precious non-metals and phosphates; petroleum processing and processing and nuclear fuel processing; production of chemical raw materials; and finally the creation and management of large-scale wholesale markets for agricultural products. The new investment areas that fall under the "prohibited" list instead concern the internal postal services industries; the construction of villas (in line with the Chinese government's efforts to cool down the real estate market and counter illegal purchases and sales of agricultural land for commercial and residential uses); and the research and development of some genetically modified foods.
In essence, the 2012 version of the Catalog opens up the Chinese market to new investment opportunities for foreign companies, reflecting a shift in government policy attention from traditional industries to areas that favor the use of advanced technologies, energy saving and the use of alternative energies, as well as the promotion of a modern industrial structure in the field of services: the imperative for China is therefore no longer quantity, but quality.
