Investment Opportunities in China Open Up Following Regulatory Changes

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Recent reforms to China’s foreign investment regime have lifted ownership restrictions and offered new preferential policies in a number of industries.

The updated Catalogue of Industries for Guiding Foreign Investment (Catalogue) and Free Trade Zone (FTZ) Negative List, both released in June 2017, remove a variety of restrictions on foreign investment, offering new opportunities for businesses previously handcuffed from doing business in China.

New opportunities arise in different contexts. Domestic demands, such as environmental and energy needs, have led the government to remove restrictions on certain industries, while policies to encourage the development of strategic sectors have driven other reforms.

This article outlines some of the intriguing new industry opportunities emerging because of the latest regulatory changes.

New energy vehicles

Both the Catalogue and FTZ Negative List lift restrictions on electric vehiclemanufacturing and related industries. China’s automobile industry has historically been restricted to foreign investment, with foreign companies required to enter a JV with a domestic partner, who must own at least 50 percent equity. Foreign companies are also limited to only two JVs for manufacturing whole and special use vehicles.

However, foreign companies can now establish more than two JVs, if manufacturing electric whole vehicles, and are no longer required to use their own brands. Additionally, the Catalogue removes special administrative measures on the manufacturing of energy power batteries for new energy automobiles.

Further liberalizations and incentive schemes could emerge in the near future: on August 16, the State Council released directives urging relevant ministries to promote FDI in new energy vehicles, among other industries.

China is already the world’s largest new energy vehicle market. By 2020, China aims for new energy vehicles sales to reach two million, and to account for 20 percent of all vehicle production and sales by 2025.

Although China’s auto industry is still restricted, domestic companies’ need for foreign technology and strong government support make new energy vehicles a growth industry for foreign businesses.

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Virtual reality and augmented reality devices

The Catalogue places research and development (R&D) and manufacturing of virtual reality (VR) and augmented reality (AR) devices under the encouraged category. VR/AR systems are still emerging technologies, and China aims to become a leader in the industry.

Although China has many innovative homegrown tech firms, the country still lags behind tech leaders such as Japan and the US for many core technologies and R&D proficiency. As such, the Chinese government sees foreign investment as a way to spur domestic capabilities and move up the value chain; China offers incentives, such as reduced corporate income tax rates, and tax holidays, to attract this investment.

China is already home to hundreds of VR and AR startups, mostly concentrated in the tech hub Shenzhen, many of which Chinese tech giants, such as Alibaba and Tencent, fund and support. A white paper published by the Ministry of Industry and Information Technology projects that the value of China’s VR industry will grow from RMB 5.66 billion (US$848 million) in 2016 to RMB 55 billion (US$8.2 billion) by 2020.