Despite the challenges in an ever-changing business environment, China is still a hot place to invest into.  While many people notice that labor intensive manufacturing investors in China relocate to south east Asia, they are being replaced by those into service, high-end manufacturing, innovation, and technology sectors.  A survey conducted by KPMG recently shows that CEOs of the China-headquartered companies are overwhelmingly confident in the country’s growth outlook.  This is in line with the current FDI trends into China, which reached US$ 103.91 billion from January to September 2016, 4.2% over the same period of the previous year.  In the meanwhile, China is also trying to improve its policies on FDI, as a material aspect of its economic reform. 

Foreign investment into China is classified into four categories, namely encouraged, permitted, restricted and prohibited, according to the Foreign Investment Industrial Guidance Catalogue issued by National Development and Reform Commission and Ministry of Commerce (“MOFCOM”), which are updated from time to time according the investment policy in China.  

The investment under the encouraged category is traditionally able to enjoy certain tax and other benefits.  A Chinese partner is required for certain sectors under the restricted category, in which case, a joint venture should be formed, and the maximum permissible foreign shareholding in the joint venture may also be specified in the Guidance. The investment classified as permitted is not subject to restrictive or favorable treatment.  

It should be noted that more liberal approaches have been adopted to foreign investment.  For example, the Free Trade Zones in China are allowed to issue their own “negative lists”.  Under the “negative list” regime, any activity not on the list will only be exempt from prior entry approval by the local agencies of MOFCOM on a case by case basis, which generally takes 3 to 6 weeks.  This will enable foreign investors to set up a business presence in China easily and quickly by making certain corporate secretarial filings.  The “negative list” regime is one of the proposed changes in the draft Foreign Investment Law published by MOFCOM for public comments in January 2015, which for various reasons has not been enacted yet. 

Instead of awaiting the Foreign Investment Law, the National People’s Congress adopted a Decision on September 3, 2016 to amend the current legislation in relation to FDI, streamlining the current FDI approval regime for a wide range of business sectors with a much-simplified filing regime, which is similar to that adopted in the free trade zones as discussed above.  Furthermore, MOFCOM also issued a draft Interim Measures on the Filing of Establishment and Related Changes of Foreign Invested Enterprises to implement the Decision.

More and more sectors are opened to increased foreign shareholding or ownership.  The recent trend includes online data processing and transaction processing, construction of power grids, and subways and real property projects.  China is also considering further lowering the threshold for foreign investment and encouraging foreign companies to invest in such industries as high-tech, environmental protection, and cutting- edge services.  

Despite worries about China’s inevitable slowdown, China has become the world’s second largest economy and the major consumer of many commodities and services, which offers plenty of business opportunities to domestic and foreign investors.  On the other hand, China has started to realize the importance of the regulatory environment conducive to business and to, among others, lower the start-up costs and open its market for foreign investors.