Beijing tightens foreign investment rules
By Olivia Chung

HONG KONG - The Chinese government has announced it will no longer encourage foreign investment in certain export-oriented manufacturing industries from December 1, in a move analysts say is aimed at easing the ire of other World Trade Organization (WTO) members.

On the other hand, China will give foreign investors greater access to the financial sector by allowing them to take part in the futures market, an area where foreign funds are currently kept out.

The new regulations were announced recently in the Catalog of Industries for Guiding Foreign Investment (2007), jointly issued by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOC), which has updated the list of industries in which foreign investment is encouraged, restricted or prohibited.

The catalogue is the legal guide for foreign investment and imports, according to the NDRC.

Wang Xinpei, the MOC's spokesman, said the update of the list was aimed at equalizing the country's industrial structure and improving the quality and standard of usage of foreign direct investment (FDI).

Shenyin Wanguo Securities said the new guide was compiled to correct some FDI problems, such as low-end production, duplicate construction, high-polluting and energy-intensive manufacturing and resource-intensive exports.

For instance, incentives granted to foreign investors in ordinary residential housing projects under the 2004 Catalog are scrapped in the new policy guidelines which take effect next month.

Among the major changes to the existing catalog is foreign investments in "projects solely for export" which have been stricken from "encouragement" category. Wang said the move showed that Beijing will no longer automatically give the green light to all export-oriented foreign investment projects.

"Export-oriented projects under the 'encouraged' category aroused the discontent of WTO members," he said, referring to some members which have accused China of threatening fair trade and the economic interests of other countries.

The move was also aimed at addressing the issues of the growing trade surplus and China's swelling foreign exchange reserves, he said.

Despite Beijing's efforts to narrow China's trade gap, latest statistics show that China's trade surplus hit US$212.36 billion in the first 10 months of this year, up 59% year-on-year. The trade surplus in October rose 13.5% from a year ago to a new record high of $27.05 billion. The previous monthly record was $26.9 billion, set in June.

And China utilized $54 billion FDI in the first 10 months, up 11.2% over the same period last year. The country approved the establishment of 30,826 foreign-invested companies in the period, down 6.78%.

In the country's financial sector, where foreign funds have been pouring in, Beijing will offer them greater access by allowing them to set up futures joint ventures with local partners.

Under the new catalog, futures companies have been reclassified from "prohibited" to the "restricted" category for foreign investment, which means foreign investors are allowed to set up futures joint ventures but local partners should take controlling stakes.

Foreign companies registered in Hong Kong or Macau have been allowed to own up to 49% of futures joint ventures with mainland partners since August, 2005, under the Closer Economic Partnership Arrangement, a regional trade agreement between the mainland and the Special Administrative Regions.

JP Morgan Chase is the latest investment bank to get approval by the China Securities Regulatory Commission (CSRC) to form a joint venture with a Guangdong-based Zhongshan Futures to provide commodity futures execution and clearing services.

Calyon Financial Group signed an agreement with CITIC East China (Group) Corp to form a joint venture futures brokerage house in March, following the mainland's first futures joint venture set up by Dutch bank ABN Amro and Beijing-based Galaxy Securities in May 2005.

"With the planned stock index futures and gold futures, the country's futures market is getting bigger and bigger, the lifting of the ban on futures brokerages will raise the standard of operation of domestic futures brokerages and promote the healthy development of the futures market," Guo Tianyong, director of the Chinese Banking Research Center at the Central University of Finance and Economics, said.

An official with a domestic futures brokerage house, which is in talks with a foreign company on a joint venture, said the company had been informed by the CSRC that they would no longer need to seek approval through CEPA, but instead they could make an application once the new rules came into force in December.

The official, who asked not to be named, said the regulations only specified that domestic partners must take controlling shares in the futures market, but it was not clear if the same rule applied to life insurance and securities and that foreign companies interested in those areas would have to wait until further details were released.

At present, foreign insurers, in most cases, can hold up to 50% of their joint ventures in China. American International Assurance is the sole foreign company with a wholly owned affiliate in the country.

Currently, overseas companies can hold up a one-third stake in their joint ventures with domestic securities brokerages and acquire a maximum 49% stake in joint venture fund management companies.

Regarding the overheated property market in China, the new catalog also restricts foreign investment in the secondary property market.

Li Wenjie general manager of Centaline China (North China region), said it's sensible that the government set restrictions on the secondary property market, which has been the core sector for the overseas property market.

The overseas transaction volume in the Chinese secondary property market accounts for 80% of the overall property transactions, though secondary property transactions represent only 40% of the overall property transactions.

According to Li's estimates, more than half of the property agencies or intermediaries in China's secondary property market are foreign-invested.

Prices in the secondary market in the mainland's 70 large- and medium-sized cities grew 6.6% year-on-year in the first three quarters of the year.

The catalog has 478 clauses, including 351 clauses under the "encouraged" category, 87 under the "restricted" category and 40 under the "prohibited" category, increasing by 94, nine and five respectively from the old version published in 2004.

Wang, the MOC's spokesman, said the new catalog will direct more foreign funds to projects that require advanced technology, such as modern agriculture and high-end manufacturing and basic infrastructure. Under services, "outsourcing" has been added to the "encouraged" category.

Olivia Chung is a senior Asia Times Online reporter.

I would love to invest in Taiwanese and HK clothing. A manufacturer friend of mine goes there 4 times a year to pick up varying styles