This information is derived from the State Department's Office of Investment Affairs' Investment Climate Statement. Any questions on the ICS can be directed to EB-ICS-DL@state.gov
Last Published: 7/20/2017

Policies toward Foreign Direct Investment

China has long relied on foreign investment to develop key sectors of its economy.  Although many industries and economic sectors remain restricted or prohibited to foreign investment, government officials recognize the important role that Foreign Direct Investment (FDI) has historically played in China’s economic development.  They have therefore continued to promise economic reforms to further open up China’s economy for foreign investment. According to the Ministry of Commerce (MOFCOM), 2016 saw China’s total inward FDI flows rise 4.1 percent from the year prior, to RMB 813.22 billion (U.S. $126 billion).  China’s sustained high economic growth rate, growing middle class, and the expansion of diverse product demand all contribute to its attractiveness as an FDI destination.

Foreign investors, however, often temper their optimism regarding potential investment returns with uncertainty about China’s willingness to offer a level playing field vis-à-vis Chinese competitors.  Foreign investors report a range of challenges related to China’s current investment climate, including: broad use of industrial policies to protect and promote state-owned and other domestic firms through employing subsidies, preferential financing, and selective enforcement of laws and regulations; restrictions on controlling ownership of foreign entities through equity caps, limited voting rights, limits to foreign participation on companies’ board of directors, etc.; weak protection and enforcement of IPR; corruption; discriminatory and non-transparent anti-monopoly enforcement; excessive national or cyber security requirements; and an unreliable legal system lacking transparency and rule of law.  The 2015 Anti-Terrorism Law, the Foreign Non-Governmental Organization (NGO) Law, the Cyber Security Law, and other measures impede local Chinese firms (especially banks) from purchasing foreign technology, raising concerns that China has back-tracked on reforms to further open up to foreign investment.

China promotes inward investment through MOFCOM’s “Invest in China” website. MOFCOM publishes laws and regulations related to foreign investment, economic statistics, lists of investment projects, relevant news articles, and other relevant information about investing in China.  In addition, each region has a provincial-level investment promotion agency through local MOFCOM departments.

Web Resources
American Chamber of Commerce China 2016 American Business in China White Paper
American Chamber of Commerce China 2017 Business Climate Survey:
U.S.-China Business Council’s China October 2016 Economic Reform Scorecard:
MOFCOM’s Investment Promotion Website
 

Limits on Foreign Control and Right to Private Ownership and Establishment

The Catalogue for the Guidance of Foreign Investment in Industries, or Foreign Investment Catalogue (FIC), governs the “pre-establishment,” or market access, phase of investment and establishes whether foreign investment in a particular economic sector or industry is “encouraged,” “restricted,” or “prohibited.”  In both the encouraged and restricted categories, the FIC clearly outlines industry sectors that are completely liberalized and those that are open to foreign investment but subject to equity caps, joint ventures requirements, and Chinese national leadership requirements.  Encouraged sectors are industries China believes would benefit from foreign investment and technology transfer, often in line with industrial policy goals.  Restricted and prohibited sectors are those seen as sensitive, possibly touching on national security concerns, or at odds with the industrial goals of China’s economic development plans. 

In December 2016, MOFCOM and the National Development and Reform Commission (NDRC) jointly issued for public comment an updated draft of the FIC that proposed reforms to further liberalize 20 sectors of the economy.  Of note, the proposed draft FIC changed the header of the restricted and prohibited section to the “nationwide negative list.”  Foreign investors interested in industries not on the negative list will no longer require pre-approval from MOFCOM, but rather, need only register their investment with MOFCOM.

The proposed revisions in the draft FIC may improve market access in some sectors, but are relatively minor, and revisions affecting investments in industries that have traditionally faced heavy restrictions, such as banking, telecommunications, and cultural industries, fall short of the reform expectations of the U.S. business community.  In addition, it is unclear how the updated FIC will be prioritized vis-à-vis other, contradictory industry-based regulations or whether other industrial policies will supersede the version of the FIC that is ultimately published. 

This uncertainty undermines confidence in the stability and predictability of China’s investment climate and impedes foreign investors’ future business planning. 

Web Resources
The Chinese language version of the 2015 FIC:
The Chinese language version of the 2016 draft FIC

Ownership Restrictions
In both the “encouraged” and “restricted” categories of the FIC, certain industries require joint ventures and/or requirements that a company be controlled by Chinese nationals.

For example:
In the oil and natural gas exploration and development industry, foreign investment is required to take the form of equity joint ventures and cooperative joint ventures.

In the accounting and auditing sectors, the Chief Partner of a firm must be a Chinese national.

In higher education and pre-school, foreign investment is only permitted in the form of cooperative joint ventures led by a Chinese partner.

In some sectors, the Chinese partners individually or as a group must maintain control of the enterprise. Examples include: construction and operation of civilian airports, construction and operation of nuclear power plants, establishment and operation of cinemas, and the design and manufacture of civil-use satellites.

In some sectors, the foreign shareholder’s proportion of the investment may not exceed a certain percentage.  For example, foreign equity ownership is limited to:
50 percent in value-added telecom services (excepting e-commerce);
49 percent in basic telecom enterprises;
50 percent in life insurance firms; and
49 percent in security investment fund management companies.

Mandatory joint venture structures and equity caps give Chinese partner firms significant control, often allowing them to benefit from technology transfer.  In addition, the relative opacity of the approval process and the broad discretion granted to authorities foster an environment where the Chinese government can impose deal-specific conditions beyond written legal requirements, often with the intent to force technology transfer as a condition of market access or to support industrial policies and the interests of local competitors.

Other Investment Policy Reviews

Organization for Economic Cooperation and Development (OECD)
China is not a member of the OECD.  The OECD Council decided to establish a country program of dialogue and co-operation with China in October 1995.  The most recent OECD Investment Policy Review for China was completed in 2008.  The OECD Investment Policy Review noted that policy changes in China between 2006 and 2008 tightened restrictions on inward direct investment, including cross-border mergers and acquisitions.
OECD 2008 report

In 2013, OECD published a working paper entitled “China Investment Policy: An Update,” which provided an update on China’s investment policy since the publication of the 2008 Investment Policy Review.  The paper noted that while China’s economic strength buoys foreign investor confidence, fears of investment protectionism are growing.

World Trade Organization (WTO)
China became a member of the World Trade Organization (WTO) in 2001.  WTO membership boosted China’s economic growth and advanced its legal and governmental reforms.  The most recent WTO Investment Trade Review for China was completed in 2016.  The report highlighted key changes between the 2011 and 2015 FIC.  In addition, it noted that the foreign investment pilot negative list expanded from the Shanghai FTZ to the FTZs of Tianjin, Fujian, and Guangdong.  The trade review also said that China encourages inward FDI, as well as joint ventures between Chinese and foreign companies, particularly in research and development.  The report also mentioned that technology transfer, while not a requirement for investment approval, is a practice widely encouraged by Chinese authorities.

WTO Investment Trade Review for China
International Monetary Fund (IMF) information on China
FDI Statistics from MOFCOM
 

Business Facilitation

Basic business registration procedures in China are difficult.  The World Bank ranked China 78th out of 190 economies in terms of ease of doing business and 127th for starting a business.  In Shanghai and Beijing, at least 11 procedures are reportedly required to establish a business, with an average timeline of more than 30 days to complete the registration process.  Steps to register a business include pre-approval for a company name, a business license approved by the State Administration for Industry and Commerce (SAIC), an organization code certificate with the Quality and Technology Supervision Bureau, registration with the provincial and local tax bureaus, a company seal issued by the police department, registration with the local statistics bureau, a local bank account, the authorization to print or purchase invoices and receipts, and registration with the Ministry of Human Resources and Social Security, as well as with the Social Welfare Insurance Center.

The Government Enterprise Registration (GER), an initiative of the United Nations Conference on Trade and Development (UNCTAD), gave China a score of 1.5 out of 10 on its website for registering and obtaining a business license.  SAIC is the main government body that approves business licenses, and according to GER, SAIC’s website lacks even basic information, such as what to do and how to do it.

Recently, the State Council—China’s cabinet—has tried to reduce red tape by eliminating hundreds of administrative licenses and delegating administrative approval power across a range of sectors. The number of investment projects subject to central government approval has reportedly dropped more than 75 percent.  The State Council also has set up a website in English, which is more user-friendly than SAIC’s website, to help foreign investors looking to do business in China:
MOFCOM’s Department of Foreign Investment Administration is responsible for foreign investment promotion in China.

Despite efforts to streamline business registration procedures, foreign companies still continue to complain about the many challenges of setting up a business, including the process of registration and obtaining administrative licenses.  Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices.  The differences among these corporate entities are significant, and investors should review their options carefully with an experienced advisor before choosing a particular corporate entity or investment vehicle.
 

Outward Investment

In 2001, China initiated a “going-out” investment strategy for SOEs to go abroad to acquire foreign assets and gain greater access to foreign markets.  Over time, this policy has evolved to include both state and private Chinese companies in a diversified number of economic sectors.  Today, China is one of the largest outbound direct investors in the world and invested over U.S. $200 billion globally in 2016 alone, according to the Rhodium Group, a leading private sector analyst of U.S.-China bilateral investment. China’s preferred investment location is the United States, where it invested over U.S. $45 billion in 2016, almost triple 2015 investment, according to Rhodium reports. 

Chinese officials support foreign investment opportunities that help China move up the manufacturing value chain by acquiring advanced manufacturing and high-technology capabilities that can be transferred back to China.  This emphasis is stressed in both the 13th Five Year Plan and the Made in China 2025 policy that aims to transform China’s economy to better compete against advanced economies in 10 key high-tech sectors, including: new energy vehicles, next-generation IT, biotechnology, new materials, aerospace, oceans engineering and ships, railway, robotics, power equipment, and agriculture machinery.  Chinese government officials provide preferred financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment in key sectors.

While China continues to push for value-added outbound acquisitions, in November 2016, Chinese officials at the State Administration for Foreign Exchange (SAFE) issued guidelines that regulate foreign currency outflow for investments considered financial in nature or investments deemed “illogical” because the investment falls outside the core business of the acquiring company.  In other words, investments made strictly for the purpose of financial returns, like commercial real estate, or investments where a company enters a completely different economic sector than it currently operates, will receive greater scrutiny from Chinese regulators.  These guidelines were intended to slow the momentum of China’s shrinking foreign currency reserves, in part brought about by a surge in outbound investment that, starting in Q3 2015, has exceeded capital inflows from foreign direct investment. 

Experts attribute China’s shrinking foreign currency reserves to two factors.  First, as China’s GDP has slowed down, the quality of investment opportunities in China that yield a high return have diminished, making foreign investors less likely to invest in China and causing Chinese investors to look overseas to other markets with better return potential.  Second, Chinese investors expect the RMB will continue to depreciate over time, which makes holding RMB-denominated investments less attractive than investments made in U.S. dollars and other foreign currencies.  In an attempt to diversify assets into different currencies, Chinese household and company investments have fled to quality destinations like the United States and Europe.

Prepared by our U.S. Embassies abroad. With its network of 108 offices across the United States and in more than 75 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.


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