This
article discusses the impact of the above regulations on foreign investment in
China and the market access for certain sectors that have been liberalised after
China's accession to the WTO.
This
article discusses the impact of the above regulations on foreign investment in
China and the market access for certain sectors that have been liberalised after
China's accession to the WTO.
China has finally joined the World Trade Organisation
('WTO'), after more than 10 years of effort in convincing
the rest of the world that it is ready to adopt an open-market economy and
promote free trade.
Prior to its accession, China was ranked 11th amongst the world's trading nations; 90% of its trading partners were WTO members, and it was the single largest economy remaining outside the walls of the WTO. The WTO needs China as much as China needs the WTO. Hence, it became plain that it was a matter of time before China would join the WTO - the dramas, posturings and tortuous negotiations notwithstanding.
In the aftermath of all the excitement, what most WTO members are interested in finding out is whether China has kept to its promises and translated all, if not most, of its WTO commitments into practical action. Have tariffs been reduced? Are the rules for investing in China still the same? How about national treatment for foreign investment enterprises? Any new opportunities for foreign investors?
In reality, China had begun to overhaul and streamline its legal infrastructure for trade and investment even before it joined the WTO. These efforts were intensified after its formal accession. Numerous laws and regulations that were inconsistent with China's commitment to the WTO have either been repealed or revised, while many more have been promulgated to honour China's commitment to liberalise its trade and services sectors.
Among the new regulations, two of the more significant ones that have been released recently are the revised Directing of Foreign Investment Provisions ('Provisions') and its revised Foreign Investment Industrial Guidance Catalogue ('Catalogue').
New Investment Guidelines and Catalogue
The first step that any foreign investor intending to invest in China should
take is to check the Catalogue to see if its intended foreign investment is
permitted in the target sector under PRC laws and, if so, to refer to the
Provisions on the procedure for obtaining the relevant investment approvals.
The Provisions and Catalogue were first promulgated in 1995 and the Catalogue
was subsequently revised in 1997 ('Old Catalogue'). Upon China's accession to
the WTO on
11 December 2001, foreign investors have eagerly awaited the revisions to be
made to the Provisions and the Catalogue so as to reflect China's WTO
commitments on market access.
The PRC State Council promulgated the new Provisions on 11 February 2002 ('New Provisions') and this was shortly followed by the joint promulgation of the new Catalogue ('New Catalogue') by the State Development Planning Commission, the State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Co-operation on 11 March 2002.
Both the New Provisions and New Catalogue came into effect on 1 April 2002 and repealed and replaced the old Provisions and the Old Catalogue. The New Catalogue reflects China's WTO commitment on market access for foreign investment in specified industries.
As in the Old Catalogue, the New Catalogue divides foreign investment projects into four categories, namely encouraged, restricted, prohibited and permitted. However, the New Catalogue has consolidated the former restricted categories A and B into a single restricted category.
The first noticeable change in the New Catalogue is the sharp increase in the number of encouraged category projects from 186 to 262 and a reduction in restricted category projects from 112 to 75. At first glance, such changes seem very encouraging for foreign investors, but a closer examination of the New Catalogue would reveal that the changes are not that substantial after all.
Encouraged category
Generally, the projects which are encouraged are still those that utilise high
and advanced technology and those that promote environmental protection and
energy conservation.
Many of the projects that were previously classified as restricted projects have migrated to the encouraged category. In addition to the businesses that are specifically listed under the encouraged category of the New Catalogue, the New Provisions also deem certain types of investment as encouraged category projects and allow foreign investors participating in these investments to enjoy the same preferential treatment and incentives granted to the encouraged category projects. Such investments include:
The scope of business for certain encouraged category projects can be expanded to include other related businesses, which may not strictly fall within the encouraged category. Examples of such projects are large scale and long-term energy development, transportation and infrastructure construction and management.
Investments under the encouraged category will also be exempted from custom duties and value-added taxes on imported equipment. Previously, such exemptions were only granted to specific sectors and localities in China.
The approval procedure for such encouraged category projects has also been relaxed. If the project does not involve any product subject to quota or require 'balancing' by the state, the municipal, autonomous region or provincial level authorities can approve it even if its total investment amount exceeds US$30m.
Restricted category
Projects that are classified under the restricted category consist mainly of
businesses which China has committed under the WTO to gradually allow greater
foreign participation, and those that utilise technology that China already
possesses.
Approvals for the combined restricted category are to be sought from the authorities at the municipal, autonomous region or provincial level. Unlike the Old Catalogue, investors are no longer required to submit project proposals for such restricted projects directly to the relevant department at the State Council level for approval.
It is also no longer mandatory for joint venture investment projects in the restricted category to specify an operating term.
Prohibited category
Most of the prohibited category projects under the Old Catalogue remain out of
bounds to foreign investment under the New Catalogue. Foreign investors are
still not allowed to invest in the broadcasting, film and television industry,
although telecommunication and supply of utilities have been moved from the
prohibited category to the restricted category.
There is also a new entry under the prohibited category, namely the cultivation of genetically engineered products.
Permitted category
As in the case of the Old Catalogue, there is no separate listing for projects
under the permitted category. Any project that is not specifically listed under
any of the above three categories is considered a permitted category project.
The approval procedure for such projects remains largely unchanged.
Central-western region
Another new feature that can be found in the New Provisions is the reference to
the Western Catalogue.
For
many practical reasons, the western region of China has fallen behind the rest
of China, especially the coastal cities, in terms of its economic development,
and thus development of this region has now become the main agenda of the
Chinese government. Along with its 'Go West' policy, and to attract more foreign
investors to the region, the Chinese government has allowed the cities in the
western region to offer greater incentives and adopt more preferential tax
treatment towards foreign investment than other regions.
In order to regulate the types of investments that will flow to the western region, the same authorities responsible for the New Catalogue promulgated the Western Catalogue in mid 2000. The Western Catalogue sets out the types of investments that are favoured and encouraged in 20 of the provinces in the central and western regions. These investments have been selected after careful consideration to suit the conditions and needs of each province and autonomous region.
Since there is an express reference to the Western Catalogue in the New Provisions, it is likely that the authorities have also intended for the New Provisions to be the guiding principles for interpretation of the Western Catalogue. Following China's accession to the WTO, the authorities are likely to revise the Western Catalogue in the near future to bring it in line with China's WTO commitments and to conform to the terms of the New Provisions.
Compliance with WTO Commitments
Like many other countries that joined the WTO, China is allowed to carry out
its obligations under the WTO in accordance with negotiated timetables. One of
such timetables is the Schedule of Specific Commitments on Services ('Schedule')
which sets out the specific timelines for China to gradually liberalise each of
its service sectors and the limitations, whether geographical or quantitative
restrictions, which China is permitted to impose in relation to each sector.
In order to reflect its commitment under the Schedule, the New Catalogue now contains an appendix that explains the progressive liberalisation of certain sectors identified in the Schedule. Generally, the content of this appendix mirrors the commitments set out in the Schedule except that the geographical restrictions stipulated in the Schedule are not repeated in the appendix. Notwithstanding the lack of geographic details, such restrictions are likely to be imposed in practice since they are part and parcel of the final package that China had struck with the rest of the WTO members.
Preliminary considerations
Before we proceed to discuss the market access for certain sectors that have
been liberalised after China's accession to the WTO, it is useful to bear in
mind the three Ws, namely:
Grandfathering
China is committed to ensure that foreign investment enterprises ('FIEs')
currently operating in China will, after China's accession, continue to enjoy at
least the market access they had at the time of accession. This will ensure that
conditions of ownership, operation and scope of activities of FIEs - as set out
in their contractual or shareholder agreements - as well as licences
establishing or authorising the operation or supply of services, will not be
made more restrictive than as at the date of China's accession to the WTO.
This affords some comfort to foreign investors who may currently enjoy better terms and benefits than that promised by China under the WTO agreement, and who may be concerned that such benefits would be taken away after the accession in order to level the playing field.
Reduction in tariffs
China has long maintained high tariffs on a broad range of products,
although it has over time reduced the rates considerably. Immediately after
China's accession to the WTO, it reduced tariffs on 5,332 products. The
reduction rates vary from product to product and are set out in the Announcement
of General Customs of China in respect of Tariff Reduction issued on 30 December
2001.
Overall, China has committed to cut tariffs from an average of 24.6% to an average of 9.4% for most products five years after its accession to the WTO.
Trading and distributing rights
Previously, the ability of FIEs to trade in China was strictly curtailed
because the right to engage in trade (importing and exporting) and the
distribution of goods (other than goods manufactured by such FIEs) was
restricted to a small number of domestic companies that have been specifically
licenced to do so. FIEs were also generally prohibited from distributing
imported products and providing related distribution services, such as repair
and maintenance services.
China has now committed itself to allowing foreign companies to engage in commission agents' business and wholesale distribution for all imported and domestically produced products within one year from the date of accession and to allow Sino-foreign joint venture in the retail sector upon accession. However, the distribution and retailing of pharmaceutical products, pesticides, mulching film, books, magazines, newspapers, chemical fertilisers, crude oil and processed petroleum products will only be open to foreign participation progressively over a period of three to five years after accession. Wholesaling for salt and wholesaling and retailing for tobacco would, however, remain out of bounds for foreign participation.
As for franchising and wholesale or retail services away from a fixed location, China has only committed to permit foreign investment within three years after accession.
Financial sector
China has agreed to open up its financial sector, specifically in relation
to banking and insurance.
For banking services, China will expand the scope and geographical opportunities for foreign banks to conduct local currency business. Foreign banks will be able to conduct local currency business: (a) with foreign clients immediately upon accession; (b) with Chinese enterprises two years after accession; and (c) with Chinese individuals five years after accession. As for geographical restrictions, local currency banking will be permitted in four cities upon accession, and thereafter four additional cities will be added to the list each year, culminating in nationwide access five years after accession.
China is also set to liberalise its insurance industry, allowing foreign insurance companies to provide a wide range of insurance products in both life and non-life insurance services. Joint ventures with 50% foreign ownership in life insurance and with 51% foreign ownership in non-life insurance will be permitted upon accession, and wholly owned subsidiaries in non-life insurance will be phased in by the second year of accession. All geographical restrictions in life and non-life insurance will be phased out within three years of accession.
To honour its aforesaid commitments, China promulgated the Regulations of the PRC on the Administration of Foreign Funded Financial Institutions and the Regulations of the PRC on the Administration of Foreign Funded Insurance Company on 20 December 2001, some nine days after its accession to the WTO. Both regulations came into effect on 1 February 2002.
Telecommunications
Foreign service suppliers were previously prohibited from providing
telecommunication services in China. After China's accession to the WTO, foreign
investors are now permitted to provide a broad range of services in China,
including value-added and paging services, database retrieval, electronic data
interchange, wireless, domestic and international wire services and internet and
satellite services. For some of these services, majority foreign ownership will
only be permitted progressively.
In preparation for the opening of the telecommunication industry, China promulgated its telecommunications law late last year. At about the same time, the Regulation on the Establishment of Foreign Funded Telecommunication Company was also promulgated to regulate the procedure and requirements for foreign investments in this sector.
Conclusion
The New Provisions and the New Catalogue only reflect part of China's many
obligations under the WTO Agreement. To comply with its market access
obligations, China will need to continue to enact a series of laws for several
years to come. It will also need to strictly enforce them.
The Chinese government has embarked on the process of reforming its national legislation. However, to implement the new laws and regulations at the provincial and local levels, China has to train and educate government officials on the new legal and regulatory regime. All this promises to be a long process.
To comply with the WTO transparency requirements, China has also promised to publish all WTO-related laws and regulations and provide procedures for comment prior to their implementation. The terms of the WTO membership also require China to provide a fair and transparent mechanism for resolving disputes.
China is now considering the procedures for judicial review of administrative actions relating to the implementation of the WTO Agreement. It remains to be seen how much latitude the courts will be given to interpret and review administrative laws and actions.
Chia Kim Huat & Quak Fi Ling
Rajah & Tann