By Xu Ping, Partner, King & Wood’s FDI Department

In continued support of foreign direct investment into China, on April 13, 2010, China’s State Council released the Further Views on the Utilization of Foreign Capital (国务院关于进一步做好利用外资工作的若干意见). These new guidelines for foreign investment in China encourage foreign funds to flow into high-end manufacturing, hi-tech and eco-friendly sectors and to the central and western areas of the nation. The guidelines restrict investment into environmentally unsound projects and in sectors suffering from overcapacity. Meanwhile, the new guidelines also promise more favorable policies for foreign-funded companies, including an array of new tax incentives.

1 Foreign Investment More Welcomed in Certain Sectors

According to China’s economic development needs and planning goals, foreign investment in high-end manufacturing, high-tech, modern services, new energy, energy efficiency, outsourcing, and environmental protection industries will be welcomed while polluting or energy-gorging projects and industries running at overcapacity will not be as welcome. Based on the above guidelines, the Foreign Investment Industrial Guidelines Catalogue issued in 2007 will be revised.

In addition, foreign-funded projects in the “encouraged” category of China’s foreign investment catalogue will benefit from lower land prices which will be discounted 30%. These policies are intended to facilitate China’s continued economic growth by targeting foreign investment in industries higher up in the economic value chain and permit environmentally sustainability.

2 New Policies With Geographic Focus

Foreign enterprises are encouraged to increase investment in China’s central and western regions with a particular focus on environmentally sound and labor-intensive businesses. This will be accomplished through tax incentives, policy support and in the development of streamlined procedures for foreign companies that relocate operations from the coastal regions to the center. Incentives will include potential matching funds, technical support, improved administration and other favorable policies. Based on revisions to the Foreign Investment Industrial Guidelines Catalogue, the Foreign Investment Dominant Industrial Catalogue in Central and Western Regions will be further revised.

3 More Open Domestic Capital Markets

Foreign investors are encouraged to participate and acquire domestic enterprises through restructuring or M&A. In particular foreign strategic investors are invited to participate in domestically listed companies, which used to be restricted for foreign investors. Foreign companies will also enjoy standardized and streamlined rules for investment in domestic securities and in corporate M&A moves. M&A transactions between foreign parties should become more streamlined, but a national security examination mechanism will also be established to review foreign M&A operations in China. Qualified foreign invested companies will also soon be allowed to list and issue corporate bonds or medium term notes in China.

4 Improved and Streamlined Operational Incentives

Multi-national companies will be encouraged to establish regional headquarters, R&D centers, financial management centers, and other critical management and operational centers in China. Imports for scientific and technological development from qualified R&D centers will be exempt from tariffs, import VAT and goods and services tax by the end of 2010 under the guidelines.

The approval procedures for foreign investment will be streamlined and the scope of approval and authorization will be reduced. Examination and approval competency for foreign investment will also continue to devolve to lower governmental levels whereby encouraged investment below $300 million for encouraged and permitted projects will be examined by local authorities rather than national ones. The devolution of approval competency for most projects will simplify and speed up the approval process for foreign investors.

In addition, the procedures on settlement of foreign exchange capital funds for foreign investment companies will be simplified. With respect to foreign investment companies operating legally but unable to meet their capital contributions requirements as a result of a tight budget, their deadlines for capital contributions may be extended.

Through these new guidelines, China reiterates its support for foreign investment and could be a response to some complaints that China was reversing its foreign investment policies in the wake of several high-profile matters involving Google and Rio Tinto. These guidelines widen market access to foreign investors and better direct the inflow of foreign capital while also improving China’s global competitiveness and promoting more efficient foreign investment into economically vital areas. Naturally detailed rules to implement these initiatives are still to come out.

Please note that this entry is provided for general information only and may not be used as a substitute for legal consultation.