The Chinese government is once again stepping up its efforts to attract foreign investment. Will these efforts have the same impact as they did in 1992?
On August 13, 2023, the State Council released the “Opinions on Further Enhancing the Foreign Investment Environment and Increasing Foreign Investment Attraction.” The goal is to fully capitalize on China’s advantage of having a super large-scale market, attract and utilize foreign investment more vigorously and effectively, and contribute to the comprehensive promotion of high-level openness to the outside world and the construction of a socialist modernized country. Recently, there has been a wave of policy releases to stabilize foreign trade, with a particular focus on strengthening domestic policies. On June 29, the “Notice on Several Measures for International High-standard Institutional Opening-up in Qualified Free Trade Zones and Free Trade Ports” was issued, followed by the “Opinions on Promoting the Development and Growth of the Private Economy” on July 19. These recent policies primarily aim to improve the business environment, strengthen credit support for foreign trade, facilitate cross-border settlements, promote smooth logistics, and expand market development.
The release of the “Opinions” signifies that China is providing more favorable conditions for foreign investment to develop the Chinese market in a comprehensive and specific manner. It is continuously deepening reform and opening-up, practically optimizing the business environment, and stabilizing the foundation of foreign trade and foreign investment. The “Opinions” introduce 24 policy measures across six key areas, with the following main points:
- Enhancing the quality of foreign investment utilization: The goal is to broaden channels for attracting foreign investment, implement the Qualified Foreign Limited Partner (QFLP) pilot program for domestic investment, establish and improve the QFLP foreign exchange management facilitation system, and support the direct use of raised offshore RMB for relevant domestic investment.
- Ensuring national treatment for foreign-invested enterprises: This involves guaranteeing participation in government procurement activities in accordance with the law, supporting equal participation in the formulation of standards in accordance with the law, and ensuring equal access to supportive policies.
- Strengthening the protection of foreign investment: Measures include improving the protection mechanism for the rights and interests of foreign investors, strengthening administrative protection of intellectual property rights, increasing administrative enforcement of intellectual property rights, and standardizing the formulation of foreign trade and economic policies and regulations.
- Improving investment and operational facilitation: This entails optimizing policies related to the stay of foreign employees of foreign-invested enterprises, exploring mechanisms to facilitate secure cross-border flow of data, coordinating and optimizing law enforcement inspections of foreign-invested enterprises, and enhancing services and guarantees for foreign-invested enterprises.
- Increasing financial and tax support: Measures include strengthening funding guarantees to promote foreign investment, temporarily waiving withholding tax on reinvested profits obtained by foreign investors domestically, implementing supporting incentives for foreign-invested enterprises in encouraged industries, and facilitating duty-free imports of equipment for encouraged foreign investment projects.
- Enhancing administrative measures to promote foreign investment: This involves improving the administrative mechanism for attracting investment, facilitating overseas investment promotion, expanding channels for promoting foreign investment, and optimizing the evaluation of foreign investment promotion.
Why have there been a series of continuous and intensive policies introduced recently to stabilize and protect foreign investment?
From a strategic standpoint, optimizing the foreign investment environment and increasing foreign investment attraction are immediate and long-term priorities in the current context. In the short term, economic development is facing new challenges and urgently needs expanded investment, boosted confidence, and promoted economic growth. Improving the business environment for foreign investment is an important means of instilling confidence and promoting investment.
From an external perspective, factors such as the reshoring of U.S. manufacturing and the implementation of foreign investment security review mechanisms have had a certain impact on foreign investment in China. Therefore, it is necessary to further intensify efforts to attract foreign investment. Intensifying efforts to attract foreign investment, promoting high-level openness, and building a new open economic system are necessary steps for establishing a “dual circulation” development pattern and constructing a modern industrial system.
What are the attractive aspects and key areas for foreign investment in the recent series of policies?
We believe that the key areas for encouraging foreign investment still lie in the high-tech sector. Based on the sectors mentioned in the government’s policies, high-tech sectors such as biomedicine, advanced manufacturing, modern services, and the digital economy are the key areas supported by policies to attract foreign investment. The goal is to leverage foreign investment to drive the development of a modern industrial system.
In the field of biomedicine, efforts will be made to expedite the landing and production of foreign-invested projects in the pharmaceutical sector, particularly in clinical trials in the fields of cell and gene therapy, and further streamline the procedures for listing overseas drugs in the domestic market. In the field of modern services, greater openness in the service industry will be encouraged, including promoting collateralized financing of intellectual property rights, equity, and related tangible assets, supporting the exploration of securitization of intellectual property rights in a regulated manner, and piloting the transfer of equity investment and venture capital in certain regions. Although the financing process for companies in the biomedicine and gene engineering sectors listed in China has been constrained or even impacted by the recent stringent measures imposed by the United States, cooperation between China and the United States in life sciences and biomedicine, including the development of intellectual property rights in many basic disciplines, obtaining FDA licenses, commercialization, production, and large-scale market entry, still strive to overcome obstacles and seek breakthroughs.
In the field of the digital economy, there will be cautious expansion of value-added telecom services such as domestic internet virtual private network services, information services, and internet access services in pilot regions. In various high-tech fields, the establishment of research and development centers will be encouraged, and foreign-invested enterprises will be encouraged to undertake major scientific research projects in collaboration with their own research and development centers. Furthermore, collaboration between foreign-invested enterprises and various types of vocational colleges (including technical colleges) and vocational training institutions in vocational education and training will be encouraged. In the past 1-2 years, there has been an increasing demand for this type of FDI, such as WFOEs applying for call centers (onshore and global offshore) in free trade zones, and ICP licenses becoming mainstream applications, whether using foreign companies’ existing domestic enterprises or using VIE structures or free trade zone enterprises as application entities. However, it is worth noting that certain industries need to guard against social problems that have become prominent in recent times, such as telecommunications fraud. As for vocational skills training institutions, starting from Shanghai Pudong New Area in 2018, licenses have been gradually granted to vocational skills training centers in major free trade zones in China, allowing wholly foreign-owned enterprises to conduct relevant training programs. Major provinces and cities independently review foreign investment license applications, which has achieved “delegation of power.” This undoubtedly provides great impetus for attracting, stabilizing, and expanding foreign investment.
The negative list and the encouraged catalog for investment will be further expanded. The person in charge of the Planning Department of the Ministry of Industry and Information Technology stated that the country’s desire to protect foreign investment in the manufacturing sector and integrate it into China’s entire industrial chain is exceptionally clear. Currently, China continues to relax market access for foreign investment in the manufacturing sector, and the general manufacturing sector has achieved comprehensive openness, with the negative list for manufacturing items in free trade pilot zones completely cleared. Based on the “Catalogue of Industries Encouraging Foreign Investment (2022 Edition),” the Chinese government continues to guide foreign investment towards advanced manufacturing, energy conservation and environmental protection, and directs it to the central and western regions as well as the northeast of the country, further improving the quality of attracting foreign investment and optimizing the distribution of foreign investment in the manufacturing sector.
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