China

1. Openness To, and Restrictions Upon, Foreign Investment

FDI has played an essential role in China’s economic development. Though the PRC remains a relatively restrictive environment for foreign investors, PRC government officials tout openness to FDI, promising market access expansion and non-discriminatory, “national treatment” for foreign enterprises through improvements to the business environment.  They also have made efforts to strengthen China’s regulatory framework to enhance market-based competition.

MOFCOM reported FDI flows grew by about 15 percent year-on-year, reaching USD 173 billion, however, foreign businesses continue to express concerns over China’s pandemic restrictions.  In 2021, U.S. businesses’ concerns with China’s COVID-19 restrictive travel restrictions were at the top of the agenda, along with concerns over PRC’s excessive cyber security and data-related requirements, preferential treatment for domestic companies – including state-owned enterprises – under various industrial policies, preference for domestic technologies and products in the procurement process, an opaque regulatory system, and inconsistent application of laws protecting intellectual property rights (IPR). U.S.-China geopolitical tensions were also cited as a significant concern. See the following:

China’s International Investment Promotion Agency (CIPA), under MOFCOM, oversees attracting foreign investment and promoting China’s overseas investment. Duties include implementing overseas investment policy; guiding domestic sub-national and international investment promotion agencies; promoting investment in industrial parks at the national, subnational, and cross-border level; organizing trainings in China and abroad for overseas investment projects; and, engaging international and multilateral economic organizations, foreign investment promotion agencies, chambers of commerce, and business associations. The agency has offices worldwide, including CIPA Europe in Hungary, CIPA Germany, and a representative office in the Hague to promote investment in the Benelux area. CIPA maintains an “Invest in China” website which lists laws, regulations, and rules relevant to foreign investors. The China Association of Enterprises with Foreign Investments (CAEFI) is a non-profit organization overseen by MOFCOM. The association and corresponding provincial institutions have hotlines to receive foreign investor complaints.

Entry into China’s market is regulated by the country’s “negative lists,” which identify the sectors in which foreign investment is restricted or prohibited, and a catalogue for encouraged foreign investment, which identifies the sectors and locations (often less developed regions) in which the government encourages investment.

In restricted industries, foreign investors face equity caps or JV requirements to ensure control by a PRC national and enterprise.  Due to these requirements, foreign investors that wish to participate in China’s market must enter partnerships, which sometimes require transfer of technology. However, even in “open” sectors, a variety of factors, including ability to access local government officials and preferences, enhanced ability to impact local rules and standards, perceptions of better understanding of the PRC market, and access to procurement opportunities, led many foreign companies to rely on the JV structure to operate in the PRC market.

Below are a few examples of industries where investment restrictions apply:

  • Preschool to higher education institutes require a PRC partner with a dominant role.
  • Establishment of clinical trials for new drugs require a PRC partner who holds the IPR tied to data drawn from the clinical research.

Examples of foreign investment sectors requiring PRC majority stake include:

  • Radio/television market survey.
  • Basic telecommunication services outside free trade zones.

The 2021 negative lists made minor modifications to some industries, reducing the number of restrictions and prohibitions from 33 to 31 in the nationwide negative list, and from 30 to 27 in China’s pilot FTZs. Notable changes included openings in the automotive and satellite television broadcasting manufacturing sectors. Sectors that remain closed to foreign investment include rare earths, film production and distribution, and tobacco products.  However, the government continues to constrain foreign investors in a myriad of ways beyond caps on ownerships. For instance, in the pharmaceutical sector, while JV requirements were eliminated in the 1990s, foreign companies must partner with local PRC institutions for clinical trials. Other requirements that place undue burden on foreign investors include but are not limited to: applying higher standards for quality-related testing, prohibitions on foreign parties in JVs conducting certain business activities, challenges in obtaining licenses and permits, mandatory intellectual property sharing related to certain biological material, and other implicit and explicit downstream regulatory approval barriers.

The negative list regulating pilot FTZ zones will lift all barriers to foreign investment in all manufacturing sectors, widen foreign investor access to some service sectors, and allow foreign investment into the radio and TV-based market research sector.  For the market research sector, caveats include a 33 percent foreign investor ownership cap and PRC citizenship requirements for legal representatives. While U.S. businesses welcomed market openings, foreign investors remained underwhelmed by the PRC’s lack of ambition and refusal to provide more significant liberalization.  Foreign investors noted the automotive sector openings were inconsequential since the more lucrative electric vehicle (EV) sector was opened to foreign investors in 2018, whereas the conventional auto sector is saturated. Foreign investors cited this was in line with the government announcing liberalization mainly in industries that domestic PRC companies already dominate.

In addition to the PRC’s system for managing foreign investments, MOFCOM and NDRC also maintain a system for managing which segments of the economy are open to non-state-owned investors. The most recent Market Access Negative List  was issued on December 10, 2020.

The Measures for Security Reviews on Foreign Investments  came into effect January 18, 2021, revising the PRC’s framework for vetting foreign investments that could affect national security. The NDRC and the Ministry of Commerce will administer the new measures which establish a mechanism for reviewing investment activities across a range of sectors perceived to implicate PRC national security, including agriculture, energy and resources, cultural products, and more.

China is not a member of the Organization for Economic Co-Operation and Development (OECD), but the OECD Council established a country program of dialogue and co-operation with China in October 1995. The OECD completed its most recent investment policy review for China in 2022.

China’s 2001 accession to the World Trade Organization (WTO) boosted its economic growth and advanced its legal and governmental reforms.  The WTO completed its most recent trade policy review for China in 2021, highlighting FDI grew at a slower pace than in previous periods but remains a major driver of global growth and a key market for multinational companies.

Created in 2018, the State Administration for Market Regulation (SAMR) is responsible for business registration processes.  Under SAMR’s registration system, parties are required to report when they (1) establish a Foreign Invested Enterprise (FIE); (2) establish a representative office in China; (3) acquire stocks, shares, assets or other similar equity of a domestic China-based company; (4) re-invest and establish subsidiaries in China; and (5) invest in new projects.  Foreign companies still report challenges setting up a business relative to their PRC competitors. Many companies offer consulting, legal, and accounting services for establishing operations in China. Investors should review their options carefully with an experienced advisor before investing.

Since 2001, China has pursued a “going-out” investment policy.  At first, the PRC encouraged SOEs to invest overseas, but in recent years, China’s overseas investments have diversified with both state and private enterprises investing in nearly all industries and economic sectors.  China remains a major global investor and in 2021, total outbound direct investment (ODI) increased for the first time in four years to reach $153.7 billion, a 12 percent increase year-on-year, according to the 2020 Statistical Bulletin of China’s Outward Foreign Direct Investment .

China’s government created “encouraged,” “restricted,” and “prohibited” outbound investment categories to suppress significant capital outflow pressure in 2016 and to guide PRC investors to more “strategic sectors.” The Sensitive Industrial-Specified Catalogue of 2018  further restricted outbound investment in sectors like property, cinemas, sports teams, and non-entity investment platforms and encouraged outbound investment in sectors that supported PRC national objectives by acquiring advanced manufacturing and high-tech assets.  PRC firms involved in sectors cited as priorities in the Strategic Emerging Industries, New Infrastructure Initiative, and MIC 2025 often receive preferential government financing and subsidies for outbound investment.

In 2006, the PRC established the Qualified (QDII) program to channel domestic funds into offshore assets through financial institutions. While the quota tied to this program has fluctuated over the years based on capital flight concerns, in 2021 the State Administration of Foreign Exchange (SAFE) approved new quotas for 17 institutions under the program to allow a potential $147.3 billion in outbound investment.

In 2013, the PRC government established a pilot program allowing global asset management companies more opportunities to raise RMB-denominated funds from high net-worth PRC-based individuals and institutional investors to invest overseas. These programs include the Qualified Domestic Limited Partnership (QDLP) pilot program and the Shenzhen-specific Qualified Domestic Investment Entity (QDIE) program. In 2021, the China Securities Regulatory Commission (CSRC) and SAFE expanded the pilot areas to at least seven jurisdictions and quotas for the QDLP to $10 billion, respectively. In April, the Shenzhen Financial Regulatory Bureau amended the Administrative Measures of Shenzhen for Implementation of the Pilot Program for Overseas Investment by Qualified Domestic Investors (“Shenzhen QDIE Measures”) to include investments in the securities market that aligns it with the QLDP program.

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The Lessons of 1989: Freedom and Our Future