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China will stimulate foreign investment in these industries in 2020 and beyond

On July 31, 2020, the China National Development and Reform Commission and the Ministry of Commerce issued a draft version ofthe Catalogue of Industries to Encourage Foreign Investment (2020 Edition). The document specifies the sectors in which foreign direct investment (FDI) will receive preferential treatment and expands the scope of FDI on the basis of the 2019 edition. The draft is still open to public consultation, but we have already summarized the key takeaways in the article below. 

 

Behind the 2020 edition of the foreign investment catalogue update  

Within more than 40 years of Chinese economic reform, China has gradually become one of the main choices for cross-border investment from Europe and the U.S. through more policies of  opening up, furthering investment facilitation and strengthening investment protection. The further introduction of foreign capital has led to the growth of China’s economy and promoted the all-round development of China’s international trade and foreign investment.  

 

In recent years, China has aimed to further advance its policy of opening up to the outside world, by continuously updating its foreign investment policies and regulations. In 2019, under the complex conditions of slow global economic growth, sluggish cross-border investment and intensified competition in various countries, China’s actual use of foreign capital amounted to RMB 845.94 billion from January to November, an increase of 6% year-on-year, continuing to become the world’s second largest cross-border capital inflow.  

 

 

Of course in 2020, the world economic situation has become more complex due to the spread of COVID-19, which increases uncertain factors affecting foreign investment, such as travel restrictions, unilateralism and protectionist policies. Accordingly, from January to June in 2020, China’s actual use of foreign capital amounted to RMB 472.18 billion, down 1.3% year-on-year. Amid the global economic challenges posed by tensions with the United States and the epidemic, China now needs to further attract foreign investment to meet its goal of ensuring stability in foreign investment throughout the year.  

 

New and improved areas that encourage foreign investment 

 With the introduction of the 2020 edition of the foreign investment list, foreign investors can enjoy preferential policies in more industries. The draft law adds 56 new industries in the Midwest, and 69 new industries in the Northeast. Compared to last year, 40 stimulated industries were revised nationwide.  

 

Regions 

Central China: China’s gradient development has turned to the rise of central China 

The central region of China has always been the most prominent region of the national three rural areas”, and has been a key area to promote a new round of industrialization and urbanization. The region holds great potential for domestic demand growth, and plays an important strategic role in current and future national regional development patterns. [1] The high-quality talent resources in Central China so far have already been found by foreign enterprises. Among them, the successful foreign-funded enterprises in Central China include  major automobile industry projects  attracting talent in Hubei, and  chip industry projects profiting from Anhui’s investment attraction policies.  

 

Western China: from great development to great development 

China’s One belt, one road policy has been instrumental in opening up Western China. Although the region already started gradually opening up in 1992, since the “one belt and one road” initiative was put forward in 2013, the Western region has become the frontier of China’s opening up to the outside world. The development of the provinces and cities along the western border brings new historical opportunities for foreign companies. [2] 

 

First of all, foreign capital in the western region has certain tax preferences. Secondly, new enterprises in transportation, power, water conservancy, postal, radio and television in the western region will get further preferential treatment. Import tariffs and import VAT will be exempted for all equipment imported for use in these encouraged industries – with the exception of commodities listed in the non-tax free import catalogues for foreign investments (these catalogues were revised in the year 2000) [3]. 

 

Northeast China: redevelopment of an old industrial base 

Northeast China has always been an important industrial area in China, with good natural conditions. Its many agricultural resources have been unique advantages of the old northeast  industrial base. The rapid development of the high-tech industry has also created a good core condition for the adjustment of economic structures and industrial evolution in this area. 

 

Industries 

The service industry: Guiding the development of FDI 

The development of cross-border investment in the Chinese service industry has benefitted from the increasing trend of economic globalization and the rapid growth of global total international direct investment. The service industry directly helps foreign-funded enterprises to speed up their integration into the Chinese market and to reduce risks and operation information costs after entering this unfamiliar market environment. China will continue to stimulate foreign investment in its services market to increase the overall competitiveness of this sector. 

 

Manufacturing: From old industry to high-tech 

Although  China’s manufacturing industry is not as strong as the manufacturing industry in Europe or the U.S., its position of large volume has been basically established, and brings competitive advantages at least in terms of scale. Among the 22 international industrial categories, China ranks first in 7 major categories, and the output of more than 220 kinds of industrial products such as steel, cement and automobile ranks first in the world. China’s manufacturing output accounted for 19.8% of the world’s manufacturing output in 2010, surpassing the United States to become the world’s largest manufacturing country. Since 2010, China is also the world’s largest net exporter of manufacturing products.  

 

90% of China’s foreign investment economy is highly concentrated in the manufacturing industry, with the high-tech manufacturing industry attracting foreign investment at a high growth rate. In China’s manufacturing industry, state-owned enterprises have a relatively large share, and technological transformation and equipment upgrading progress is relatively backward. Accordingly,  attracting foreign investment in technology and equipment will perform an immeasurable function in the development of China’s high-tech manufacturing industry. 

Based on the 2019 edition, the 2020 edition of the catalogue of foreign investment has significantly increased its encourage for foreign investment in some areas. Among them, there are manufacturing-related industries including raw materials, parts and components, final product manufacturing and other industries. The further optimization and upgrade of the policy to encourage foreign investment will attract more foreign investment to participate in the development of China’s high-end manufacturing industry, not only for the domestic technology-intensive heavy industry and high-tech industries to bring more successful management models and manufacturing technologies, to help  develop China’s manufacturing market, but also to promote domestic market competition, enhance the relative competitiveness of manufacturing industry, and accelerate the development of high-quality manufacturing industry.  

 

The 2020 edition of the catalogue of foreign investment has significantly increased its encouragement for foreign investment in many manufacturing-related industries including the raw material industry, parts and components, and final product manufacturing. The upgrade of the policy aims to attract more foreign investment to stimulate the development of China’s high-end manufacturing. The Chinese government puts great emphasis on the domestic technology-intensive heavy industry and high-tech industries to bring more successful management models and manufacturing technologies, to help develop China’s manufacturing market.  Additionally the government wants to promote domestic market competition, to enhance the global competitiveness of its high-end manufacturing industry.  

 

Conclusion: Opening up to more FDI is a win-win process 

Since the recent economic reforms and opening up strategies China’s competitiveness and manufacturing quality ] have greatly improved, but state-owned and private enterprises still have  certain resource limitations and internal deficiencies. The introduction of foreign investment can inject capital and vitality into the country, bringing needed technical and management experience. Foreign investors are  optimistic about China’s sound economic outlook and optimized business environment, hoping to capitalize on China’s huge market.,  

 

If you would like to learn more about the opportunities the new foreign investment law can bring your business,  contact Dr2 Consultants Shanghai through: shanghai@dr2consultants.eu 

 

Reference data sources and literature: 

  1. “National Absorption of Foreign Direct Investment In November 2019” http://www.mofcom.gov.cn/article/tongjiziliao/v/201912/20191202923875.shtml 
  2. “China’s Absorption of Foreign Investment in the First Half of 2020” http://www.mofcom.gov.cn/article/i/jyjl/m/202007/20200702984165.shtml
  3.  the financial sector. Further expand the scope of encouragement to promote foreign investment. Financial industry, the later issue of 2019 07. 
  4.  Yang Zhihuang. Foreign capital’s participation in the rise of central China in the new era should take new actions [J]. Journal of Shaanxi University of administration One belt, one road initiative,  
  5.  Duan Xiufang, Kou Ming long, has an impact on China’s western provinces’ regional economic growth. 
  6. https://zhidao.baidu.com/question/289002601.html