China State Council, the Cabinet, promulgated a new guideline in relation to foreign investment in China on April 6, 2010, i.e. Several Opinions on Better Utilizing Foreign Investment (《国务院关于进一步做好利用外资工作的若干意见》), an overall review of prior legal systems on foreign investment, which is set to have far-reaching effects on foreign investor community.

With China having accumulated the largest foreign reserve in the world that seemed to be a burden than advantage now, and with the financial crisis still biting in most world economies, it may be the ripest timing for China to make a shift in its foreign investment policies towards a more quality-oriented approach than the past quantity-oriented approach.

The Opinions is organized in five parts respectively dealing with optimizing the foreign investment structure, promoting foreign investment in central and western regions of China, diversifying methods of utilizing foreign investment, deepening administration of foreign investment and cultivating better investment environment. Among those, we summarize some of the points that may interest you most.

1. The Catalogue of Industries for Guidance of Foreign Investment is to be revised to expand foreign investment fields, encourage foreign investment in high-end manufacturing, high-tech industries, modern service industries, new energy and energy-efficient and green industries, and on the other hand to restrict investment in high-pollution, high energy consumption and raw material intense industries.

Accordingly, the standards for qualifying as a high-tech company will be revised. Multinationals are encouraged to set up in China their regional headquarters, research and development centre, procurement centre, financial management centre, and settlement centre. Before December 31, 2010, goods used for technology development imported by qualified foreign-funded R&D centre are exempted from customs duty, and VAT and consumption tax.

Encouraged foreign investment projects that do not require large parcels of land will have preferable access to land with 30% discount on the minimum land prices as set forth in the Minimum Base Prices for National Industry Land.

2. Foreign investments are encouraged to move westwards in China. Accordingly, Catalogue of Advantageous Industries for Guidance of Foreign Investment in Central and Western China (《中西部地区外商投资优势产业目录》) will be updated in line with the changes in Catalogue of Industries for Guidance of Foreign Investment. The favorable treatment on enterprise income tax, while already eliminated in eastern coastal regions, are still kept for central and western region in order to boost strategic policy of developing the western China region.

Industry development zones that have once been contained for fear of wasting land are encouraged through the cooperation between the eastern region and the western region in the principles of mutual complement, industry coordination and profit sharing, under the Opinions.

3. Foreign investors are encouraged to carry out merger and acquisition activities in the restructuring and reorganization of domestic enterprises. In addition, private equity funds get an injection also as the Opinions requests to actively utilize PE funds and improve the exit mechanism.

4. The central government is now delegating greater power to local governments in terms of approving foreign investment projects that belong to the encouraged and permitted categories in the Catalogue of Industries for Guidance of Foreign Investment. Now, encouraged and permitted projects whose total investment amounts (inclusive of capital increase) are below USD three hundred millions ($300,000,000) can be approved by local governments unless otherwise provided in the Catalogue of Government Verified Investment Projects (《政府核准的投资项目目录》).

5. It is required in the Opinions to further improve the administration of foreign exchange for foreign invested enterprises, and simplify the conversion formalities of foreign exchange of capital accounts. For foreign invested enterprises that have been operating in accordance with law and that have difficulty in making capital contribution as originally approved, extension of original capital contribution period may be granted.

It is worth mentioning here that Shanghai city has issued the Provisional Measures on Approval and Registration of Converting Debts into Equity of Foreign Invested Enterprises （《上海市外商投资企业债权转股权审批登记试行办法》）the end of last year under which, creditors of a foreign invested enterprise in Shanghai may, in satisfaction of certain conditions, choose to become shareholders of that enterprise by converting its creditor’s rights into equity interests in that enterprise.

If you are interested to know more about the Opinions or any other content of this article, please do not hesitate to contact us.

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