The Catalogue: Chinese Inbound FDI Reform

Location China. Green pin on the map.

“Location China” by Zerophoto/stock.adobe.com

The Catalogue – Chinese Inbound FDI Reform

By Dennis Meseroll, Executive Director of Tractus Asia; and Kirsten Olson, Sr. Research Analyst

The China National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) recently released the revised 2017 Catalogue for the Guidance of Foreign Investment Industries.  The Catalogue, which goes into effect July 28, details the restricted, prohibited, and encouraged industries for foreign investment.  Currently the Catalogue is available only in Chinese with an English version release likely later this year.  MOFCOM released an English language press release that summarizes the changes: http://english.mofcom.gov.cn/article/newsrelease/significantnews/201707/20170702607364.shtml

The reforms follow the goals of the State Council’s 2015 initiative Made in China 2025, a plan to transform China from a big manufacturer to a manufacturing industry superpower comparable to Germany, Japan, and the United States.  The majority of the industries with eased or encouraged investment regulations in the Catalogue correspond with the 10 key industries included in the Made in China 2025 plan.  For example, the Catalogue cancelled former controls on investment in battery manufacturing for new-energy vehicles while Made in China 2025 looks to expand production in energy-saving vehicles.

The reforms also display Beijing’s concern with the shift in global FDI. Chinese outbound FDI continues to grow despite capital controls implemented last year, while inbound FDI decreases. Chinese outbound FDI trends are influenced, in part, by the Shanghai and Shenzhen Stock Exchange bubble of 2015 after which Beijing temporarily froze trading. Since then mature Chinese firms are eager to diversify their portfolios abroad and are being actively encouraged to do so by Beijing despite the ongoing influence of capital controls which we will go into in a later blog post.  A cooling Chinese economy, rising labor and other costs, and “near-“ and “re-shoring” trends in supply chain development in traditional export destination countries are some of the reasons foreign manufacturers have stopped looking to the Middle Kingdom for greenfield investments in global export production.

Will easing restricted industries help shift the flow FDI?  Can China achieve its goal of becoming a manufacturing industry superpower? There are many factors driving the decision on where to locate manufacturing and how to structure an investment and these need to be carefully evaluated in a disciplined, objective and systematic fashion before capital is committed.

What is clear is that the 2017 revised Catalogue presents new opportunities for overseas investors and changes the arithmetic by which China must be evaluated as an investment destination.

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