China | Milestones

China will allow foreign firms to increase their ownership stakes in encouraged sectors and enter into previously protected industries, according to investment guidelines drafted by the National Development and Reform Commission. The NDRC posted the draft of the new guidelines, known as the Catalog for the Guidance of Foreign Investment Industries, on its website on November 5 and asked for public comments. If approved, the revised guidelines could take effect by the end of the year. The NDRC first introduced the foreign investment catalog in 1995, and the current proposal, if passed, will be the sixth revision.

The proposed changes would reduce the number of sectors with limits on foreign investment from 79 to 35, the number of industries requiring joint ventures from 43 to 11, and those requiring majority Chinese ownership from 44 to 22. Industries potentially opened up for further foreign participation include steel, ecommerce, real estate and insurance, among others.

“I was surprised by how many important industries the draft catalog might open up to foreign businesses,” says Dan Harris, founder and partner at Seattle law firm Harris Moure and co-author of the China Law Blog. “It does, however, bear mentioning that the catalog lists what is encouraged, but it is not law. It is not uncommon for the catalog to list something as encouraged, but then to see laws remain on the books that make it impossible for a foreign company to actually engage in those industries.” The proposed revision comes at a time when China’s overall economic growth is slowing. The country’s GDP growth slowed to 7.3% in the third quarter, its lowest rate since the first quarter of 2009. From January to September foreign direct investment fell by 1.4% from a year earlier, and China’s outbound foreign investment rose by 21.6%. The further opening up of China’s economy to foreign investment could ease resistance to the expansion efforts of Chinese companies abroad.

In another move aimed at liberalizing its economy, China launched the Shanghai–Hong Kong Stock Connect on November 17. The program offers channels for foreign investors to buy domestic stocks listed in Shanghai and for Chinese nationals that meet certain minimum investment requirements to buy stocks listed in Hong Kong. Regulators could expand the program to include shares listed on China’s smaller Shenzhen exchange within the next few years.

“What I see with both the catalog and China opening its stock market to increased foreign investment is proof that at least some element of China’s government wants an increase in foreign investment,” says Harris. “The big issue is whether China is merely talking about liberalizing or will actually do so by enacting laws to make that possible and by treating foreign companies at least somewhat comparably to how it treats domestic businesses.”