Other BriefingsChina Issues 24 New Measures in Clear Directive to Boost Foreign Investment
The Chinese government is ramping up efforts to attract foreign direct investment in China by optimizing the business environment for foreign companies and investors. The new guidelines provide clear directives to local governments to tackle challenges faced by foreign companies in China, from unequal access to government procurement to cumbersome cross-border data transfer procedures. We discuss the potential impact of the guidelines on China’s foreign investment landscape.
China’s cabinet, the State Council, has released a new set of opinions on boosting foreign direct investment in China. The document, titled The Opinions of the State Council on Further Optimizing the Foreign Investment Environment and Intensifying Efforts to Attract Foreign Investment (the “Opinions”), contains 24 suggestions for attracting foreign investments, which range from improving intellectual property rights to facilitating cross-border data flows.
The Opinions have spurred cautious optimism among foreign business organizations in China, with the EU Chamber of Commerce in China stating that they “could go a long way to improving business confidence if they are implemented in a timely, coordinated and consistent manner”.
The new document is the most comprehensive set of proposals for improving the environment for foreign companies in China that have been released in recent years and is expected to serve as a guide for local governments to implement specific policies to increase support and improve business confidence among foreign companies.
Efforts to boost foreign investment since reopening
The new guidelines come as the Chinese government has struggled to build the confidence of foreign-invested enterprises (FIEs) since the lifting of COVID-19 restrictions in late 2022.
The latest data from MOFCOM shows that foreign capital in China has declined considerably since the reopening. Between January and July 2023, actual use of foreign capital in China reached RMB 766.7 billion (US$111.8 billion), a decrease of 4 percent year-on-year. In dollar terms, this figure decreased by 9.8 percent year-on-year.
Nonetheless, the number of newly established FIEs increased by 34 percent year-on-year with 28,406 new companies, indicating that companies have been eager to enter the China market after the lifting of COVID-19 restrictions, even if the total foreign capital amount has decreased.
The government has been actively seeking to attract foreign capital since reopening, with high-level officials highlighting the important role that foreign companies will play in China’s post-pandemic recovery.
In April and May of this year, Shanghai released measures aiming to attract foreign investment and improve the business environment in the city.
Visits by foreign officials from countries such as France and Brazil have also focused on boosting trade and investment ties and resulted in the signing of bilateral business agreements with foreign companies.
The latest Opinions are more significant than previous efforts because they provide considerably more clarity and detail on the types of policies that the central authorities want provincial and municipal governments to implement on a local level.
Proposals to boost foreign direct investment in China
R&D and technological development
The Opinions emphasize the need to attract foreign investment in key research and technological fields, enabling FIEs to develop products and services within China and advancing China’s ambitions in key fields. To this end, the measures call for supporting FIEs to establish R&D centers, jointly carry out technology R&D and industrial applications with domestic companies and undertake major scientific research projects.
For instance, the Opinions call for supporting foreign investment in the field of biomedicine and pharmaceuticals by:
- Accelerating the implementation and commissioning of foreign-invested projects in the field of biomedicine;
- Encouraging foreign-invested enterprises to carry out clinical trials of overseas marketed cell and gene therapy drugs; and
- Optimizing the application procedures for marketing registration applications for drugs that have been marketed overseas and transferred to domestic production.
The Opinions also look to diversify investment channels, encouraging qualified investors to establish investment companies and regional headquarters. They also call for implementing the Qualified Foreign Limited Partnership (QFLP) program, a pilot inbound investment program for foreign companies and investors and supporting direct domestic investment with RMB raised overseas.
Improving access to green energy
FIEs and MNCs in China have been eager to decarbonize their operations to meet their climate pledges and participate in China’s green transition. However, despite China’s rapid progress in building out renewable energy capacity, the electricity grid remains highly reliant on coal, making it difficult for companies to reduce their carbon footprints.
The Opinions seek to provide more support to foreign companies in consuming more green energy, stating that authorities should “introduce policies and measures to promote green power consumption, and support FIEs to participate more in green electricity certificates (GECs) and cross-provincial and cross-regional green power trading (GPT).”
Companies in China have been turning to tools such as GECs and GPT as a means of reducing their consumption of fossil fuels.
China recently updated its guidelines for its green energy market, aiming to improve the participation of companies in GPT and GECs. The updated guidelines, which apply to the provinces, municipalities, and autonomous regions powered by the State Grid (all but five mainland provinces and autonomous regions in southern China), will make it easier for companies with lower renewable energy needs to collectively negotiate green energy prices with the power suppliers, and the provision of GECs to companies that purchase green energy.
By offering more mechanisms to reduce reliance on fossil fuels, these changes to China’s green energy market could make the country significantly more attractive to environmentally conscious foreign companies.
Ensuring equal participation in government procurement
The Opinions address a long-standing complaint by FIEs in China that they have unequal access to government procurement and bidding, stating that authorities should “guarantee FIEs to participate in government procurement activities in accordance with the law.”
Among the proposals to level the playing ground for government procurement are revisions to the Government Procurement Law, researching and innovating on cooperative procurement methods, and “supporting FIEs to innovate and develop world-leading products through measures such as first-order purchases.”
They also seek to increase the accountability of government agencies in bidding processes by carrying out inspections to ensure the fair participation of business entities in government procurement activities, investigating and dealing with possible violations, such as differential treatment of FIEs, and promptly reporting typical cases. They also state that FIEs should be empowered to raise questions and complaints if they believe that government procurement activities have harmed their rights and interests.
In addition, the Opinions call for introducing policies and measures “as soon as possible” to further clarify the standards for goods that are “produced in China”. China’s Government Procurement Law states that central and local governments should prioritize the purchase of products, goods, and services produced in China unless they cannot be obtained locally or cannot be obtained on reasonable commercial terms.
The standard for a product or service to be produced domestically is generally done by the value-added ratio of the product in the local areas, which should be over 50 percent. However, more specific details on the criteria for the value-add are needed in order to accurately assess whether a product or service meets the criteria for preferential consideration in government procurement.
The EU Chamber of Commerce welcomed the proposals to improve participation in government procurement, stating that it is “positive that the State Council has announced that requirements for goods and services ‘produced in China’ be clarified, as it could prevent discretionary interpretation by local officials.”
Ensuring participation in standard-setting and equal policy treatment
The Opinions advocate for FIEs to have a fair role in shaping industry standards, encourage their active involvement in standardization efforts, and stress the importance of treating FIEs equally when it comes to preferential and support policies.
FIEs will be supported to participate in the creation of standards on a level playing field as per legal provisions. This involves ensuring transparency throughout the standardization process, allowing FIEs and domestic companies to equally engage in standardization committees and activities within the boundaries of the law.
In addition, FIEs are encouraged to establish their own enterprise standards or collaborate with other businesses to develop these standards. The promotion of such enterprise-level standards is especially targeted in comprehensive pilot demonstration zones, which aim to expand the opening up of the service industry.
Finally, the Opinions call for ensuring that FIEs are granted equitable access to policies designed to support industrial growth and boost domestic demand. Unless explicitly defined by laws, regulations, or matters of national security, policies should not discriminate against FIEs or their products and services based on brand limitations or foreign ownership. No additional conditions should be set for FIEs and their products and services to enjoy policies.
Strengthening intellectual property rights
Tackling another long-standing complaint held by foreign companies in China, the Opinions seek to improve the confidence of FIEs by enhancing the protection of their intellectual property rights (IPR).
Among other proposals, the Opinions recommend refining the administrative ruling system for patent infringement disputes and enhancing the enforcement of these rulings. The establishment of intellectual property workstations at exhibitions across regions will aid in accepting copyright, patent, and trademark applications and provide effective measures to prevent infringements.
The Opinions stress a resolute stance against the infringement of IPR of FIEs, particularly for instances of cross-regional and successive violations.
They also emphasize the need to crack down on misinformation and “malicious speculation” that infringes on the legitimate rights and interests of foreign companies and investors, such as publishing and spreading false and infringing information online. This is tied to a recent campaign by the Cyberspace Administration of China (CAC) to combat misinformation and fake news about companies online. Under new rules for implementing the campaign, companies can report misinformation about the company or infringements such as impersonation of the company to the host platform, which will be required to review the complaint.
Optimizing visa and residence procedures for foreign employees
The Opinions propose to further facilitate visa and residency procedures for foreign employees of FIEs in China, specifically naming “foreign executives, technicians, and their families”.
Embassies and consulates stationed in key countries for attracting investment will be supported to provide facilitated measures for MNC executives to apply for visas. In addition, foreign senior management and technical personnel hired and recommended by qualified FIEs should be facilitated in applying for permanent residence.
China recently relaxed requirements for on-arrival business visas, allowing foreigners traveling to China for business activities on short notice to apply for a business visa on arrival, rather than having to obtain one before traveling.
In addition, foreigners applying for residence permits will be permitted to keep their passports while waiting for their permits to be issued (which can take a few weeks), allowing them to travel more freely and handle other administrative procedures.
Improving cross-border data transfer procedures
China’s regulations on cross-border transfer of personal information (PI) has been a particular headache for foreign companies. Under China’s Personal Information Protection Law (PIPL) and related regulations, companies that wish to transfer the PI collected from users in China are required to undergo certain procedures in order to transfer it outside of China. China’s Data Security Law (DSL) also imposes similar requirements for the export of “important” data outside of China.
Depending on the volume and sensitivity of the PI in question, this could involve a security assessment, third-party certification, or the signing of a standard contract with the overseas recipient of the PI.
Cross-border data transfer, also referred to as cross-border data processing in the regulations, is defined broadly and includes scenarios in which an employee outside of China remotely accesses the PI stored in China (the PIPL and DSL also require companies that collect PI or important data in China to store the data domestically).
Due to the global nature of their operations, these requirements have been particularly difficult for FIEs and multinationals in China to navigate. Despite the release of various guidelines and standards for the implementation of cross-border PI transfer regulations, companies have complained of unclear requirements and slow administrative procedures.
The Opinions call for establishing “green channels” for qualified FIEs, which would presumably facilitate cross-border PI transfer procedures. In addition, they require authorities to “efficiently carry out security assessments for the export of important data and personal information”.
Moreover, they propose piloting a list of “general data” that can be transferred freely across the border in Beijing, Tianjin, and Shanghai. These regions should also build a dedicated service platform and provide cross-border PI transfer compliance services.
In response to the proposals to improve the cross-border PI transfer system, the EU Chamber of Commerce stated that “European companies are looking for reforms to China’s overly stringent data governance regulations in a way that can facilitate businesses’ transfer of data across borders for legitimate business purposes.”
Optimizing tax policies for FIEs
The Opinions suggest a series of tax policies designed to attract and retain foreign investment, ranging from funding support and tax exemptions for reinvestment to preferential treatment for foreign individuals and incentives for investments in specific sectors.
Specific suggestions include increasing support for significant foreign-funded projects to facilitate their swift implementation, providing support in the implementation of preferential tax policies for companies and their foreign employees, and supporting investment in encouraged sectors specifically.
Enhancements to the utilization of foreign investment promotion funds at various local government levels will be made, with a focus on bolstering services for key industrial chains. Support is advocated for local regions to provide assistance within their legal jurisdiction to investment projects of pivotal multinational corporations.
The Opinions also aim to further encourage domestic reinvestment of foreign capital by waiving withholding income tax on profits earned by foreign investors within China, provided it is reinvested domestically. This policy has been implemented since 2018.
On the proposal to improve tax policies for FIEs, the European Chamber of Commerce stated that it “could have an immediate impact on business confidence”. However, it also said that there was an “urgent need” for tax authorities to clarify whether certain tax-exempt fringe benefits for foreign employees in China would be extended beyond their current expiry date of December 31, 2023.
This refers to a series of tax-exempt “benefits-in-kind” (BIK), which include tax-exempt items, such as housing rental, children’s education costs, and language training costs. The State Tax Administration and Ministry of Commerce recently announced the extension of these benefits until the end of 2027.
The European Chamber noted that an extension of this policy would “demonstrate a firm commitment to the foreign business community, as well as domestic firms that hire foreign nationals.”
How effective will the proposals be in attracting foreign capital?
As has been stated by numerous observers, the effectiveness of the new proposals will ultimately depend on their implementation. The central and local governments have previously released similar documents on boosting foreign investment and improving the business environment, but haven’t always yielded considerable results.
However, the specificity of the Opinions provides much clearer directives to local governments than previous documents have. This clarity will help local governments better formulate and implement targeted and effective policies at the local level.
Given the clarity of the directives, it is reasonable to expect that local governments will release more granular and prescriptive documents in the coming weeks and months. If these efforts do a good job of addressing the challenges faced by foreign companies, they could be effective in moving the needle on capital inflows to China.
Improving the situation for foreign companies on issues, such as cross-border data transfer, IPR protection, and equal access to government procurement, could significantly improve the mood among foreign companies while helping them to attract more foreign talent.
About Us
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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