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Special> China International Fair For Investment & Trade> Beijing Review Exclusive> Legal-Ease
UPDATED: June 14, 2008 NO. 25 JUN. 19, 2008
Investing in China's Big Ticket Restricted Industries II

China's booming economy is drawing foreign investors in record numbers. We look at how the regulations affect doing business in the energy and automotive industries in China.


With the release of the new Catalogue for the Guidance of Foreign Investment Industries in November 2007, Beijing signaled a new approach to handling foreign direct investment (FDI) in its energy sector. Under pressure to clean up a growing environmental catastrophe, the government is pushing FDI toward developing clean production, reproducible energy and ecological protection. Foreign capital is not permitted in the exploration of rare and non-reproducible mineral resources, or in high consuming and polluting industries.

Foreign investment in projects involving important and scarce mineral resources or non-renewable energy production, such as mining and sifting of low-grade ore has been restricted in the new catalogue and the production and supply of electricity, gas and water is now off-limits.

The government is now also encouraging foreign investors to invest in and operate energy facilities such as power plants in China. In a governmental white paper released late last year, the State Council stated that China encourages foreign investment in:

- Construction and operation of thermal power plants with a single-generator capacity of 600,000 kw and above;

- Power stations burning clean coal;

- Power stations featuring heat and power co-generation;

- Hydropower stations mainly for electricity production;

- Nuclear power stations in which the Chinese side holds the dominant share; and

- Power stations with renewable energy or new energy resources.

In addition, the government is encouraging foreign investment in technology and equipment production for thermal, hydro and nuclear power stations with a considerably large generating capacity as well as for thermal power desulphurization. The construction and operation of coal pipeline transportation facilities are also being encouraged along with investment in advanced technologies and advanced management practices to shift focus from short-term fossil fuel exploitation to renewable energy resources.

Because of the extreme need to develop its national oil production, the government moved to deregulate its oil markets in an effort to promote hi-tech transfer and foreign expertise in the field by encouraging foreign investors to move in.

In April 2007, the Ministry of Commerce issued two guidelines on how domestic and foreign companies could apply for wholesale crude and refined oil licenses. According to the guidelines, applications by domestic companies will go through a 40-day review and applications for foreign companies will be four months.


Less than 10 years ago, China's annual car production did not match the output of a single large auto company in a developed country. Now thanks to rising incomes, plunging sticker prices and a widespread availability of car loans, automobile sales double almost every year, and auto and auto part makers are all clamoring in to cash in on the world's most revved-up market.

The big global automakers-General Motors, Honda, Toyota, Ford and Volkswagen-are all already in China and all operate joint ventures with local companies. The Chinese Government, with a view to enabling the development of a strong domestic industry, sought to swap the market access to foreign firms with technology transfers by means of joint ventures.

While China is looking to development of both strong domestic and international players, foreign investors in China are hoping to capture the huge potential of the domestic market and to use China's cheaper labor and manufacturing costs as a base for global exports.

In accordance with the Catalogue for the Guidance of Foreign Investment Industries, the manufacturing of complete automobiles is officially an "encouraged industry," though foreign investors are limited to joint ventures where the foreign investment shall not exceed 50 percent. The manufacturing of key spare parts for automobiles as well as research and development of key technologies, including disc brakes, driving rods, automatic gearboxes, fuel pumps for diesel engines, superchargers, electronic cluster gauges, crankshafts and connecting bars for diesel engines above 8 liters, anti-lock braking systems, electronic braking distribution systems and driving control systems are also encouraged.

In addition, to help develop its domestic auto industry, China applies a 25-percent tax on imported auto parts-the same tariff rate it applies to finished imported autos-if they account for 60 percent or more of the value of a whole vehicle.

This 25-percent tariff hurts luxury carmakers like BMW, Mercedes-Benz, Cadillac and Chrysler as the size of their production remains small and their models rely heavily on imported parts. In 2006, General Motors started importing some Cadillac models rather than locally producing them because of the high production costs brought on by importing spare parts.


Investing in China's most heavily regulated industries requires not only an understanding of the regulatory issues, but also a full appreciation of everything that comes with them. Many sectors have been under state control since 1949 and are just recently being opened up to foreign investment. Others are considered part of China's overall economic and political strategy. The payoffs, if they are there, are in the future for most of the big multinationals.

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