China: FDI restrictions continue to be relaxed
Lewis Lu of KPMG China explains how the country has introduced a range of business-friendly policies to incentivise foreign investment in 2021.
Foreign direct investment (FDI) has long played a crucial role in driving the development of China’s economy. China continues to be one of the world's most attractive investment destinations, being the second largest FDI recipient for the past several years.
It is estimated that in 2020, even against the backdrop of a challenging global economic environment, China hit a new record of more than $140 billion in FDI, up more than 6% on the year. The Chinese authorities have recently made a whole series of regulatory changes to support the continuation of this trend.
To promote FDI, China’s new foreign investment law came into effect from January 2020. This was followed in June 2020 with updated nationwide and free trade zone (FTZ) ‘negative lists’ for foreign investment, which reduced the industries for which foreign investment is restricted or prohibited. This was followed in December 2020 by an update to the ‘negative list for market entry’, which governs the sectors in which private enterprise (both domestic and foreign) can invest – this needs to be read in parallel with the foreign investment lists. Under this, just 123 sectors are now off limits to private capital – down from 328 in 2016.
In December 2020, a new Catalogue of Encouraged Industries for Foreign Investment was released, applicable from January 2021. Enterprises in business sectors designated as ‘encouraged’ may be granted a range of tax, customs and other support, such as preferential awards of land use rights, by local governments. Encouraged sectors have been increased from 1108 to 1234, relative to the 2019 catalogue. These include advanced manufacturing (e.g. new materials, environmental protection), modern services (e.g. research and development, cross-border e-commerce, online education and medical) as well as food processing, tourism, medical devices, and shipping. Some of these sectors are nationally encouraged and others are encouraged for the less developed western region of China, for the old industrial north east, and for the key development focus area of Hainan island.
From February 2021, there is also a new ‘negative list’ for the Hainan free trade port (FTP), which is even more permissive than the existing national and FTZ lists. This drops the remaining restrictions for mining and auto manufacturing and further reduces those on telecommunications, education and legal services.
In parallel to all this, the newly agreed China-EU Bilateral Investment Treaty (BIT) (announced in December 2020) also commits China to further open up the manufacturing, automotive, financial services, medical, cloud services, shipping and air transport sectors to European investment.
China is also undertaking measures to facilitate outbound investment, including recent rule changes made by China’s central bank and foreign exchange administration in January 2021 to permit Chinese enterprises to lend more to their overseas subsidiaries.