China unveils measures to increase inbound FDI

While the number of newly registered foreign invested enterprises (FIEs) in China continues to grow year-on-year, FDI has not kept pace. A slight annual decline in FDI reflects the long-term shift of foreign investment from manufacturing into the service sector.

The Chinese government understands the importance of FDI to the country’s economy, and at a July 2017 meeting it proposed measures to encourage more of it.

Negative list system

With the creation of the Shanghai Free Trade Zone in 2013, a ‘negative list’ system was established, which outlines the sectors where foreign investments are restricted. Since then, five other free trade zones (FTZs) have been created, and the negative list method has been adopted in all cases. In tandem, these negative lists have been modified to allow foreign investment participation in a wider range of industries and project types, and the negative list method is now also used outside the FTZs.

In the July meeting, the government reiterated its commitment to using the negative list approach and also tasked the National Development and Reform Commission and the ministry of commerce to further reduce restrictions on foreign investment projects. In response, the ministries are currently working to expand foreign investment access into China’s transportation, telecommunications, outsourcing, banking, insurance and securities markets.

Simplifying rules and regulations

In addition to mandating a wider range of permitted foreign investments, the State Council instructed the ministries to improve the overall business environment for foreign investors by simplifying relevant laws and regulations, and by repealing regulations that may conflict with the goal of encouraging wider foreign investment.

Not only are the rules and regulations for FIE registration and ongoing compliance being relaxed as part of this effort, but communication channels for foreign investors with government authorities are also being improved. One example is a policy introduced in November 2017 by several key government agencies to allow FIE participation in discussions and development of national standards related to doing business in China.

Other government mandates include improving protection of cross-border profits and earnings transfers; supporting foreign investors that engage in M&A activities with domestic companies, allowing foreign investor participation in mixed ownership of state-owned businesses, and improving protection of FIE intellectual property.

Tax incentives

Harking back to the days of freely offered tax incentives, the government has also requested the modification of certain tax policies. In response, the State Administration of Taxation and several other ministries issued a notice in December 2017 to eliminate withholding tax when foreign investors that own FIEs directly reinvest profits distributed by the FIEs. Reinvestment must be in priority industries as listed in the Catalogue for the Guidance of Foreign Investment Industries, and must result in either registration of a new FIE or purchase of equity in an existing company.

Another new policy from November 2017 offers tax cuts to companies engaged in advanced, hi-tech and high-value-added services. Qualifying businesses in the info tech, technical business process outsourcing and technical knowledge process outsourcing industries will enjoy a 15% corporate tax rate. Additionally the qualification criteria are less rigorous than those defined for hi-tech manufacturing companies several years ago.

Other policies provide tax incentives to multinational companies that set up regional headquarters in their jurisdictions. To encourage higher value-added industries, the government has committed to ongoing support for more foreign investment in the various national development zones and special economic development zones being developed in the western and north-eastern provinces.

Boost to foreign workers

The government also recognises the importance of foreign workers in encouraging FDI. The ministry of foreign affairs and the ministry of public security have been instructed to ease restrictions and processes for highly talented foreign employees to enter and remain in China. Long-term work and residence permits are now offered, and the criteria for obtaining permanent resident status are also being modified. These policy changes will doubtless benefit foreign investors who want to staff their FIEs with trusted existing employees.

In the last two months of 2017, several new or revised regulations to directly provide incentives or increased support for inbound FDI were issued by various government agencies, and more policy changes are expected in 2018. While some questions and doubts remain over the extent to which current restrictive policies may be relaxed, it is clear China’s leaders are serious about attracting more FDI.

As a result, foreign investors already have more investment options, and more are expected, perhaps at an accelerated pace compared with what has been witnessed in past years. Nonetheless, patience is required: China moves toward its long-term goals one step at a time.

Flora Luo is associate director and Scott Heidecke is a senior consultantat Nexia TS Shanghai, a member of accounting and consulting firm Nexia International.