China Issues Policy to Further Boost Foreign Investment

China Issues Policy to Further Boost Foreign Investment

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On Sunday August 13, 2023, the State Council released the Opinions to Further Optimize the Environment for Foreign Investment and Increase Efforts to Attract Foreign Investment (“Opinions”).1 The Opinions include 24 policy measures in six aspects, including lifting the quality of using foreign investment, ensuring equal treatment of domestic and foreign businesses, and increasing financial and tax support, in a bid to enhance the business environment for foreign investors and boost foreign investor confidence amid an economic slowdown, bleak foreign investment outlook and tougher international trade environment.

According to the National Bureau of Statistics, China’s GDP grew by 6.3% in Q2 from a very low base in 2022. However, when compared to Q1, China’s GDP grew by just 0.8% from April to June, much lower than the 2.2% quarter-on-quarter growth in Q1.2 China’s foreign direct investment (FDI) were 84.35 billion in US dollars from January to May 2023, a year-on-year decrease of 5.6%, and FDI in the first half of 2023 was down by 2.7%.3,4

The Opinions were issued a month after the Central Committee of the Communist Party and the State Council jointly released the “Opinions on Promoting the Development and Growth of the Private Economy” on July 19 aiming to build a “bigger, better and stronger” private sector of which foreign businesses are a big part.5 The August 13 Opinions mark another significant effort by the central authorities in China to stimulate its struggling post-Covid economic recovery and boost confidence of foreign investors dampened by stringent data control policies, recent dawn raids on foreign firms in China, detention of foreign company executives, closure of databases and concerns over the ambiguity of newly adopted counter-espionage legislations.

According to the Opinions, foreign investors will be encouraged to establish R&D centers in China to undertake major scientific research projects. The government will accelerate the implementation of foreign-invested biomedicine projects; encourage foreign-invested companies to conduct in China clinical trials of cell and gene therapy drugs already marketed overseas; optimize the procedures for registration of drugs that have been marketed overseas and will be manufactured in China; and add more cities that make certain value-added telecommunications services open to foreign investment in pilot programs. Foreign investors are encouraged to engage in vocational education and training in such areas as advanced manufacturing, modern services and digital economy by working with professional training institutions. Special working mechanisms will be paired with major and key foreign investment projects, and policy support and services will be provided to facilitate the early implementation of the projects. The focus on R&D is linked to China’s efforts to enhance self-reliance and circumvent restrictions by the United States and other countries on the export of high-tech products, and in some industries may encounter impediments in the home countries of the foreign companies.

The Opinions promise national treatment to foreign-invested companies with respect to government procurement, participation in standard-setting, and support policies. With respect to national treatment in government procurement, new policies and measures will be introduced as soon as possible to further define what constitutes “production in China”. The revision of the Government Procurement Law will be accelerated, and special inspections will be carried out to ensure equal participation of foreign businesses in government procurement activities. Except as explicitly stipulated in laws and regulations (or for national security reasons), foreign-invested enterprises and their products and services will not be excluded or discriminated against based on such reasons as foreign branding. The government will continue to strengthen protection of foreign investment and intellectual property and administrative enforcement in this regard. On the other hand, red tape will be cut. For example, regulatory inspections of foreign-invested companies with low credit risk may be reduced, and inspections by different regulatory authorities may be consolidated.

With respect to financial and tax support, special central government foreign and economic development funds may be made available to landmark foreign investment projects to accelerate implementation of such projects. Local governments are to be encouraged to give support within their statutory authority to investment projects by major multinational companies.

Foreign-invested companies investing in sectors encouraged by the State will be favored. Foreign-invested companies investing in sectors under the Catalogue of Encouraged Industries for Foreign Investment may be eligible for benefits from local governments. On January 1, 2023, the list added a record high of 239 items to encourage foreign investment in advanced manufacturing, modern services, high tech and the green economy sector, as well as less developed parts of the country, in particular.6 Expatriates in foreign-invested companies may also enjoy tax preferences for housing, children’s educational fees and other allowances.

Of particular interest in the post-Covid era, the Opinions pledge to optimize entry-exit and residence policies for foreign employees of foreign-invested companies. The Opinions make it clear that the Chinese government will facilitate the entry-exit and residence for foreign executives and technical personnel (and their families) of foreign-invested enterprises; direct Chinese embassies and consulates stationed in major foreign investment source countries/regions to continue to facilitate visa applications by executives of multinational companies; facilitate applications for permanent residence for eligible foreign executives and technical personnel in foreign-invested companies; and facilitate applications for foreign permanent resident IDs with respect to public transportation, financial services, medical insurance, and online payments.

The Opinions also call for the relevant departments to develop a convenient management mechanism for cross-border data transfer security. The Opinions pledge to create a green lane for eligible foreign-invested companies to efficiently conduct security assessments for the export of important data and personal information. In addition, Beijing, Tianjin, Shanghai, and the Guangdong-Hong Kong-Macao Greater Bay Area are authorized on a pilot basis to generate a list of “ordinary data” that can flow freely, and build a service platform to provide cross-border data flow compliance services. The current rules require even small-scale foreign-invested companies that share limited quantities of personal information with their overseas headquarters to undergo a cumbersome self-assessment for data outbound transfers. A list of ordinary data that can flow freely will be welcome news for multinational companies that need to transfer human resource data and customer data to global headquarters in the course of regular business operations if it means that such ordinary data, if below a certain threshold, will no longer be subject to data export security assessments, the filing of standard data transfer contracts and personal data certification.

The Opinions mark another strong effort by China to encourage foreign investors to stay and expand in China. It remains to be seen how the policies will be implemented and if the so-called “promise fatigue” experienced by foreign executives with respect to China’s recurring pledges of transparency, equal treatment and fairness will be eliminated and confidence can be restored, particularly given China’s overall emphasis on self-reliance under its Dual Circulation policy which places priority on both self-reliance and exports, and amidst fraught relations with many of the world’s leading democracies and trade partners.