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China continues efforts to attract foreign investment

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Lewis Lu of KPMG China looks at recent efforts to attract foreign investment into China’s manufacturing and high-tech sectors.

China’s 14th National People’s Congress and the Chinese People’s Political Consultative Conference held meetings (the so-called ‘Two Sessions’) between March 4 and March 13 2023. The annual government work report, released during the meetings, set a focus on attracting foreign investment among the Chinese government’s eight core economic tasks for 2023. Foreign indirect investment (FDI) growth had slowed in 2022, though it still stood at 6.3%. In response, initiatives were announced in October 2022 and January 2023, and follow-on documents to the annual government work report will take these efforts further.

The October 2022 initiatives, set out by the National Development and Reform Commission and the Ministry of Commerce, focused on FDI into the manufacturing sector. For several years, a corporate income tax incentive has existed, which defers the 10% withholding tax applying to outbound dividend distributions from China subsidiaries of foreign MNEs, so long as these are reinvested in China. It is proposed to improve this incentive by giving the same government support (in terms of land and energy subsidies) to such dividend reinvestment as is given to freshly established enterprises.

Furthermore, to support the operations of foreign-invested manufacturing enterprises, improvements will be made to trade customs clearance, export control and trade remedies, including in free trade agreements.

The January 2023 initiatives, set out by the Ministry of Commerce and Ministry of Science and Technology in 16 measures, focused on FDI in research and development (R&D) centres. Some of the provisions included:

  • Encouraging financial institutions to provide financial support to foreign-invested R&D centres that conduct fundamental and cutting-edge research. Other local authority support will also be directed to foreign-invested R&D centres that provide R&D services for the local area in question. This can include subsidies for equipment purchase, land, and infrastructure, and is also extended to foreign-invested R&D centres which take the form of open innovation platforms;

  • Simplified approval procedures for foreign-invested R&D centres;

  • Simplified administration procedures for the cross-border transfer of IP and technologies, into and out of China, particularly within MNE groups for the latter; and

  • Foreign-invested R&D centres can obtain work permits for foreign staff for up to five years and support for housing, children’s education, and health care will be available.

The government work report also envisages that, in 2023, further measures will be adopted to loosen restrictions on foreign investment in currently restricted sectors (e.g., the modern services sector).

Further, a notable matter announced during the Two Sessions is the revamp of important state-level government bodies overseeing economic policy. These include setting up a new National Financial Regulatory Administration (NFRA) to supervise the financial industry, (other than the securities industry) and restructuring the science and technology ministry.

The NFRA will replace China’s Banking and Insurance Regulatory Commission and it will also take over some responsibilities (such as financial consumer protection and investor protection) from the People’s Bank of China (the central bank) and the China Securities Regulatory Commission.

The restructuring of the science and technology ministry signals the rising emphasis placed on innovation and China’s continued national drive for technological self-sufficiency.

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