Policy on Foreign Investment

I. Attracting Direct Foreign Investment

The focus of China's utilization of foreign funds is to attract direct foreign investment. The policy finds expression primarily in the following:

It is necessary to further optimize the structure of industries seeking foreign investment. Emphasis is placed on encouraging foreign investment to flow to agriculture, high- and new-tech industries, basic industries, infrastructure, the environmental protection industry and export-led industries. Positive efforts are being made to guide foreign investment to flow to the technological upgrading of traditional industries and old industrial production centers. Work continues to be done to expand labor-intensive projects complying with the industrial policy. Projects that jeopardize national security or damage social and public interests, pollute the environment and disrupt the ecology are strictly prohibited.

It is imperative o continue expanding foreign investment areas. Efforts are being made to open wider competitive industries to overseas investors and increase the scale of utilizing foreign investment in petrochemical and building industries. It is necessary to attract foreign investment in a differentiated and selected manner to develop and utilize mineral resources. Efforts are being made to promote step by step the opening of service trade to the outside world; active efforts are being made to try out the utilization of overseas funds in the development of tourism resources and water transport; work is being done to expand the scale of experiments in opening up in domestic commerce, foreign trade and travel agencies; efforts are being made to open wider accounting and legal consulting service sectors and air transport and agent business; and work is being done to make experiments in opening up financial and telecommunications sectors in a step-by-step and controlled way, while establishing a perfect and effective supervisory mechanism.

It is necessary to improve the regional layout of foreign investment. Efforts are being made to continue to exhibit the advantages of the eastern region in opening up and utilizing foreign funds, aid the region in vigorously expanding capital- and technology-intensive industries and export-oriented industries, and actively guide and encourage foreign investment to flow to the central and western region.

It is necessary to positively guide the investment of trans-national companies and open wider the domestic market to the rest of the world. It is necessary to promote in a selected manner cooperation between large state-owned enterprises with trans-national companies, encourage Chinese companies to cooperate with trans-national companies in establishing research and development centers or in forming a complete set of system. Efforts are being made to give full scope to the role of existing laws and policies concerning the utilization of foreign funds, in order to advance the sound development of existing foreign-funded enterprises.

It is imperative to further improve the hard investment environment, and stepping up construction of infrastructure such as energy, transportation and public utilities in urban areas, while energetically improve the soft investment environment.

In accordance with the state industrial policy and the policy on foreign funds, high-quality large and medium-sized state-owned enterprises will be selected to be listed on the international securities market. While trying to make a success of the enterprises listed in Hong Kong, efforts are being made to explore other international securities markets.

II. Industrial Direction Guidance

To guide the direction of foreign investment, to enable the direction of overseas investment to suit the plan for China's national economic and social development and to help protect legitimate rights and interests of overseas investors, the Chinese government, in line with the requirements of the industrial policy, released on June 20, 1995, the ¡°Provisional Regulations on Guiding the Direction of Foreign Investment¡± and the ¡°Guidance Catalog for Industries Seeking Foreign Investment.¡± In December of 1997, it also revised the ¡°Guidance Catalog for Industries Seeking Foreign Investment¡± and expanded the scope of foreign investment encouraged by the state. (please refer to Appendix II)

The ¡°Guidance Catalog for Industries Seeking Foreign Investment¡± serves as the basis for guiding examination and approval of foreign-financed projects. Foreign-financed projects fall into four categories, namely, the categories of encouragement, permission, restriction and ban. Foreign-financed projects under the categories of encouragement, restriction and ban are included in the ¡°Guidance Catalog for Industries Seeking Foreign Investment.¡± Foreign-financed projects other than the three categories fall under the category of permission. Foreign-funded projects under this category are not included in the ¡°Guidance Catalog for Industries Seeking Foreign Investment.¡±

III. Regional Direction Guidance

China's opening-up endeavor began first in the eastern coastal region, and moved to interior regions gradually in phases and tiers. The eastern region enjoys a fairly favorable investment environment and many preferential policies. That is why most reform measures were initiated in the eastern region, which is home to the five special economic zones, 14 coastal open cities and the Pudong New Area in Shanghai. So, to date, the overwhelming majority of overseas-funded enterprises have been established in the region. In contrast, foreign companies have launched fewer investment projects in China's central and western region.

In recent years, with the strategic focus of China's economic development shifting gradually westward, the Chinese Government has formulated relevant policies on assistance regarding the central and western region, vigorously increased investment in the region, and speeded up construction of infrastructure such as water conservancy, transport and telecommunications there. Meanwhile, it has been encouraging foreign companies to invest in the region. These policies are as follows:

-- Foreign companies are being encouraged to invest in infrastructure construction and agricultural projects in the region. As regards investors in infrastructure projects such as energy and transport ones in the region and agricultural projects encouraged by the state, in accordance with the tax laws and with approval by authorities, the enterprise income tax shall be levied and collected at a reduced rate of 15%.

-- Foreign companies are being encouraged to invest in the central and western region. All provincial capital cities (capitals of autonomous regions) of interior provinces pursue the same policies as the coastal open cities. The conditions on approving projects which fall under the category of restriction in coastal areas or projects whose set ratio of foreign companies' stock rights is subject to restriction and on the degree of the market openness, appropriate relaxation can be made in the central and western region. Efforts are being made to encourage and attract labor-intensive projects in the coastal areas to move to the central and western region. If foreign-funded enterprises in coastal areas to re-invest in the central and western region, provided the ratio of foreign investment exceeds 25%, they can enjoy the same treatment as foreign-funded enterprises. for the areas and projects in which the state permits experiments, the central and western region can in principle proceed simultaneously with the eastern region.

-- Foreign companies are being encouraged to carry out technological upgrading of military enterprises shifting to production of civilian goods. With respect to the projects involving the establishment of joint ventures between foreign companies and backbone state-owned enterprises in the central and western region, if they involve the projects which fall under the category of restriction in the ¡°Guidance Catalog for Industries Seeking Foreign Investment¡± or the projects whose ratio of foreign companies' stock rights are restricted, restrictions can be relaxed appropriately, and necessary assistance will be granted in utilizing foreign loans, the allocation of domestic supporting funds, preferential loans and the financial refunding.

-- Foreign companies are being encouraged to participate in developing mineral and tourism resources and related industries in the central and western region, and to undertake crop cultivation, aquatic breeding and animal husbandry projects with special characteristics.

-- Foreign companies are being encouraged to join hands with enterprises in coastal areas in establishing Sino-foreign joint ventures in the central and western region.

Although the central and western region is relatively backward, it enjoys an enormous development potential.

In the first place, the potential in developing resources. China's major mineral, energy and primary products all come from the central and western region. Northeast China, north China, the Yellow River Valley and the Jianghan Plain are the best-known granaries in China. A considerable part of water, land, heat and solar energy resources in Xinjiang and the Hexi Corridor in Gansu has not been developed or utilized fully. Coal in Shanxi Province, Shaanxi Province, the Inner Mongolia Autonomous Region, Henan Province and Anhui Province, hydropower in Yunnan, Guizhou and Sichuan provinces, and nonferrous metals, precious metals, petroleum and natural gas in northwest China all have enormous reserves and are of great value of development. A great many cultural relics along the Yellow and Yangtze rivers, the Silk Road in northwest China, beautiful mountains and rivers and scenery of ethnic minority areas in southwest China, well-known mountains and rivers in Hunan, Anhui and Jiangxi Provinces are world-famous tourist sites.

Second, the potential of the industrial foundation. The central and western region has had a certain industrial basis. The petrochemical and power equipment manufacturing industries in northwest China, the textile industry in Shaanxi and Henan provinces, the metallurgical and automobile industries in Hubei Province, the machine-building and electronic industries in Sichuan Province and the tobacco industry in Yunnan Province are vital to China. In the 1960s and 1970s, China carried out large-scale construction the ¡°Third Line¡± (military factories) by undertaking a number of basic industrial and military projects in southwest China. Since China initiated reforms and opening up, ¡°Third Line¡± enterprises have made great progress in shifting to production of civilian goods.

Third, the potential of labor and human resources. Labor costs in the central and western region are comparatively low. Large numbers of agricultural laborers in some densely-populated areas in the central region need to shift to the non-agricultural sector at present and in the future. Although the educational quality of the population in the central and western region is, on the whole, lower than that of the population in the eastern region, some areas in which universities, colleges and research institutes are concentrated or which have a solid industrial foundation, such as Wuhan in Hubei, Changsha in Hunan, Xi'an in Shaanxi, Hefei in Anhui, Chengdu in Sichuan and Chongqing, have large numbers of technical and managerial personnel.

Fourth, the market potential. The central and western region makes up about 60% of China's population. With economic growth and the increase in earnings of residents, potential market demand in the region will be enormous. A number of central cities are backed by a vast hinterland, with their markets extending far and wide.

Fifth, the potential in expanding trade with neighboring countries. The central and western region shares a land border line of tens of thousands of km with ten-plus countries. Many of the countries have been pursing the policy of economic restructuring and increasing trade in recent years. The region enjoys a unique advantage in enhancing economic and trade relations with these countries. The tentative plan being discussed for the establishment of a new Asia-Europe bridge economic belt will push forward economic cooperation between ten provinces and autonomous regions (including eight in the central and western region) in China's eastern, central and western regions and Central Asia and Europe. The plan for cooperation and development in the Mekong River Valley will help accelerate the development of hydropower resources in China's southwestern region. The Tumen River cooperation and development plan will enable Heilongjiang and Jilin provinces to bring their comparative advantages into full play and expand their export-led economy. The central and western region enjoys bright prospects in economic and trade cooperation with neighboring countries.

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