Supply Chains: China

Investment Climate

In 2021, China was the world’s second highest recipient of foreign direct investment (FDI) and is forecasted to become the largest global economy by 2028. After having historically depended on exports to fuel its rapid growth, China is in the midst of shifting its economy to rely more on domestic consumption. Despite a plethora of investment restrictions, the economy continues to attract significant levels of FDI and remains the world’s manufacturing powerhouse. In 2021, China received US$180.9 billion of inbound FDI versus US$133.7 billion five years earlier, an increase of 35 percent, and real GDP grew by 8 percent.

China’s large and growing middle class represents an attractive market for foreign firms along with its low-cost and high-quality manufacturing, skilled workers, and developed infrastructure. Nonetheless, foreign investors face a number of barriers, including caps on ownership and requirements on joint venture partnerships with local firms, lack of regulatory transparency, and a weak intellectual property regime. China has made raising its place in global value chains a top priority and currently ranks 29 out of 146 in economic complexity.

China has been steadily working on implementing more FDI-friendly policies across various sectors. This has included measures such as the 2019 Foreign Investment Law, which standardized requirements and regulations for inbound investment for certain sectors, including automobiles and financial services, among others. In recent years, China has also been updating its “negative list,” which has lifted some restrictions in the oil and gas, telecommunications, resource management, and financial sectors. China’s top sources of FDI in the past few years have included South Korea, the United States, and Germany.

Key Data Points

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Recent Investment/Supply Chain Policies

National

Subnational

Economy-Wide Policies

TAX INCENTIVES

National

On March 18, 2022, the Ministry of Finance released an “Announcement on Further Implementing Preferential Income Tax Policies for Small and Low Profit Enterprises.” Under this scheme, the corporate income tax (CIT) liability of small and low-profit enterprises (SLPEs) will be halved for the portion of taxable income between RMB 1 million (US$152,800) and RMB 3 million (US$ 458,500). Small subsidiaries of foreign multinational enterprises (MNEs) in China are also able to benefit from these tax breaks.
On February 25, 2021, the Ministry of Commerce issued a Circular on Centering on Building a New Development Pattern and Effectively Stabilizing Foreign Investment. The circular lists 22 specific measures to stabilize foreign investment in critical industries, including preferential tax and land policies to attract foreign investment and income tax concessions to attract foreign workers.

ADMINISTRATIVE BARRIERS

National

On March 12, 2022, the Ministry of Commerce updated China’s “Negative List for Market Access.” The updated list includes 117 industries, down from 123 on the 2020 list. Among other changes, the new list lifts restrictions on stock issuance, mergers and acquisitions of listed companies, and internet financial information services. Investors are also no longer required to seek prior approval to engage in these industries.
On July 20, 2021, the State Council issued Guideline No. 25, which calls for “streamlined administrative procedures and better services” to “energize market entities and improve the business environment.” According to the guidelines, “efforts should be made to streamline administrative approval procedures, formulate a new negative list for market entry, and tighten regulation over monopoly conduct and unfair market competition.”
On June 3, 2021, the State Council issued Circular No. 7 (2021), which reforms the business permit approval system to “stimulate the vitality of market entities.” According to a government press release, a “simplified, highly efficient, fair, and transparent industry access rule with low threshold and strict management will be established in an effort to make administrative operation more convenient and expectable for market entities.”
On April 15, 2021, the State Council issued Circular No. 10 (2021), which calls for further administrative reforms to promote “high-quality development” and ensure “stability” and “security.” Reforms include reducing the number of professions requiring government-approved licenses, improving market access standards for micro and small-sized e-commerce operators, optimizing review procedures for tax refunds, and more.
On March 22, 2021, the Ministry of Commerce circulated a “Notice about the Relevant Matters on Issuing Confirmation Letters on Domestic and Foreign-funded Projects Encouraged by the State for Foreign-funded Enterprises,” which simplifies approval procedures for foreign-invested projects in industries covered by China’s Catalogue of Industries for Encouraging Foreign Investment. It no longer requires foreign-invested projects under US$30 million to follow filing procedures for approval and hands over the approval process for projects between US$30 million and US$300 million to provincial-level authorities.
On March 1, 2021, the Ministry of Commerce unveiled the “Notice of the Ministry of Commerce on Focusing on Constructing the New Development Pattern and Doing a Good Job of Stabilizing Foreign Investment.” The circular laid out 22 measures to further spur foreign investment in key industrial sectors, which include "deepening the reinforcement” of the Pre-establishment National Treatment Plus Negative List Management System Regarding Market Access and the 2020 Catalogue of Industries for Encouraging Foreign Investment.
On February 25, 2021, the Ministry of Commerce issued a Circular on Centering on Building a New Development Pattern and Effectively Stabilizing Foreign Investment. The circular lists 22 specific measures to stabilize foreign investment in critical industries, such as improving the service system for foreign-invested projects and optimizing the information reporting system for foreign investors.
On December 27, 2020, as part of its new Foreign Investment Law, the National Development and Reform Commission and the Ministry of Commerce released their annual Catalogue of Encouraged Industries for Foreign Investment (2020 Version), which came into effect on January 27, 2021. The 2020 catalogue contains a total of 1,235 industries — an additional 127 industries compared with the previous year. Some industries identified include manufacturing, technology, and agriculture.
On December 10, 2020, as part of its new Foreign Investment Law, the National Development and Reform Commission and the Ministry of Commerce released an updated Market Access Negative List. The new list has been reduced to 123 items, compared with 131 in 2019. This relaxes requirements in certain sectors, including oil and gas, resource management, and trading and financial services.
On August 12, 2020, the State Council issued Circular No. 28 (2020) on Stabilizing Foreign Trade and Investment. The circular aims to protect foreign trade entities and keep supply chains stable amidst the COVID-19 pandemic, by lowering the threshold for foreign R&D centers to enjoy preferential policies, facilitating customs clearance processes, improving the business environment at ports, and more.
On January 1, 2020, President Xi Jinping promulgated the revised PRC Foreign Investment Law (FIL), which aims to “actively promote foreign investment, protect the lawful rights and interests of foreign investment, and standardize the regulation of foreign investment.” Under this law, a revised Market Negative List and Catalogue of Encouraged Industries for Foreign Investment have been released, which reduce restrictions in certain sectors and identify additional industries as priorities for the Chinese government for promoting foreign investment.
On July 1, 2019, the National Development and Reform Commission and the Ministry of Commerce released their annual Catalogue of Encouraged Industries for Foreign Investment (2019 Version), which came into effect on July 30, 2021. The 2019 catalogue contains a total of 415 industries — an additional 67 industries compared with the 2017 version.

Subnational

On October 18, 2021, the State Council released Circular No. 106 (2021) that temporarily adjusts articles in existing laws restricting foreign investment in Beijing’s service industries in eight key areas, including education, telecommunications, construction and performing arts. These adjustments waive the 50 percent cap on foreign ownership for information services and value-added telecommunications businesses, open up domestic virtual private network (VPN) businesses to foreign investment, and allow foreign investments in certain education and training institutions.
On September 25, 2020, the Shanghai Municipal People’s Congress issued Regulations on Foreign Investment, which came into effect on November 1, 2020. The regulations “grant foreign investors and their investments no less favorable treatment than that accorded to domestic investors and their investments”; allow projects listed under the Catalogue of Encouraged Foreign Invested Industries to receive preferential treatment for taxes and land; provide foreign-invested research and development centers with greater access to services; and more.

SUBSIDIES

National

On August 12, 2020, the State Council issued Circular No. 28 (2020) on Stabilizing Foreign Trade and Investment. The circular aims to protect foreign trade entities and keep supply chains stable amidst the COVID-19 pandemic by providing extended financial support to “key foreign-funded enterprises,” among other measures.

Subnational

On March 11, 2022, the Beijing Municipal Commerce Bureau released “Several Measures on Boosting the High-Quality Development of the First-Store and First-Launch Economies” to further support the transformation of the capital into an “international consumption center.” According to the measures, companies that set up their first store in Beijing and companies that hold new product launch events of famous brands are eligible for up to RMB 5 million (US$784,000) and RMB 2 million (US$313,600) in financial support, respectively.
On February 17, 2022, the city of Shenzhen introduced “Several Measures to Accelerate the Construction of an International Consumption Center City." As part of this initiative, the city has rolled out several incentive grants to encourage famous foreign and domestic brands to enter the Shenzhen market. These include a subsidy of up to RMB 200,000 (US$31,394) for famous foreign and domestic brands entering Shenzhen, with each company eligible to receive up to RMB 5 million (US$784,000) in rewards each year, and an RMB 500,000 (US$78,486) subsidy for well-known brands that establish independent legal entities in Shenzhen.
On February 14, 2022, the city of Shenzhen announced an incentive of up to US$15.7 million for foreign enterprises that have invested in new projects. This incentive applies to companies that invested at least US$50 million of foreign capital in the city in 2021 or US$30 million in 2020. Recipients will be rewarded with 2 percent of the foreign capital put into use with maximum funds awarded to a single entity not to exceed US$15.7 million.

SPECIAL ECONOMIC ZONES

National

On December 31, 2020, the National Development and Reform Commission and the Ministry of Commerce released their 2020 Hainan Free Trade Port (FTP) Foreign Investment (FI) Negative List, effective February 1, 2021, which relaxes foreign investment restrictions in certain sectors, including mining for rare earths, radioactive materials and tungsten; car manufacturing; data processing, data centers and online content distribution; social surveys and market research; and commercial non-litigation legal affairs.
On June 2, 2020, the State Council released a "Masterplan" for its Hainan FTP containing a number of measures to boost and ease foreign trade and investment on the island province. According to China Daily, in late December 2020, a draft law formalizing the free trade port status was submitted to a bimonthly session of the National People’s Congress of the People’s Republic of China.

Subnational

On September 7, 2021, the State Council released the Plan for Comprehensively Deepening Reform and Opening Up of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. The plan looks to (1) encourage the establishment of representative offices by foreign and Hong Kong-Macao legal firms in the zone, (2) develop regulations to better protect the interests and rights of foreign capital and businesses, and (3) facilitate visas, and residence certificate applications for foreign talents.
On September 3, 2021, the State Council released a circular with 19 measures to “promote trade and investment facilitation and deepen reform and innovation in the pilot free trade zones (FTZs).” According to the circular, the Shanghai, Liaoning and Henan pilot FTZs will “experiment with unified processing of foreign and domestic currency accounts, in an effort to innovate bank account system management.” The circular also called for “the securitization of intellectual property assets … and better judicial review of arbitration.”
On August 24, 2021, the Shanghai Municipal Government released the “14th Five-Year Plan for Developing an International Financial Center,” which contains 44 policy measures to further liberalize Shanghai’s financial industry and open it to overseas investors. It outlines specific targets for Shanghai’s financial industry from 2021 to 2025, including reaching a direct financing level of RMB 26 trillion (US$4 trillion).
On March 1, 2021, the Standing Committee of Shanghai Municipal People's Congress implemented the new “Rules of Shenzhen Special Economic Zone (SEZ) on Commercial Registration.” The rules simplify documentation requirements for companies looking to establish themselves in the SEZ. Applicants are no longer required to submit certain forms including the “Notice of Name Pre-approval”; “Information Materials of Domicile or Business Site”; and “Documents of Appointment of the Responsible Persons, Senior Managers, and Other Relevant Members.”
On November 19, 2020, the People’s Bank of China announced it would no longer require foreign-invested enterprises to maintain a separate account for renminbi-denominated capital flows in Shanghai’s Lingang Special Area. The new policy aims to “promote financial opening-up in Shanghai and encourage FDI in the free trade zone.”
On February 14, 2020, the People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission, State Administration of Foreign Exchange and Shanghai municipal government jointly issued “Opinions for Further Accelerating the Construction of Shanghai as an International Financial Center and Providing Financial Support for the Integrated Development of the Yangtze River Delta Region.” The guideline lists 30 measures, including selecting foreign institutions to partner with large commercial banks to set up wealth management joint ventures, and opening up its US$44 trillion financial industry.

Information and Communication Technology

TAX INCENTIVES

National

On February 8, 2021, the State Council approved a plan to set up cross-border e-commerce comprehensive pilot zones in 27 cities and regions. The government will exempt value-added and consumption taxes for cross-border e-commerce retail exports in the pilot zones and assist enterprises with setting up and sharing overseas warehouses.
On March 29, 2021, the Ministry of Finance announced import tax cuts for semiconductor companies in response to the chip shortage caused by the COVID-19 pandemic. According to the Ministry of Finance announcement, certain chipmakers will be exempt from paying import taxes on raw materials and machinery that cannot be produced domestically.

Financial Services

ADMINISTRATIVE BARRIERS

National

On March 10, 2021, the China Banking and Insurance Regulatory Commission (CBIRC) issued a Decision on Amending the Implementation Rules of the Regulations of the People's Republic of China on Foreign-funded Insurance Companies. According to the CBIRC press release, restrictions on foreign shareholding in joint venture life insurance companies have been removed.
On October 18, 2020, the National Development and Reform Commission (NDRC) announced a list of 40 authorized measures to implement pilot reforms in Shenzhen to "build the city into a demonstration area of socialism with Chinese characteristics." According to a government document released alongside the NDRC statement, measures include giving greater autonomy to state-owned enterprises to carry out reforms, lifting restrictions on foreign ownership in telecommunications, streamlining visa rules to attract talent, and building a new intellectual property rights protection system to include digital intellectual property.

Automotive

Administrative Barriers

National

On December 27, 2021, the National Development and Reform Commission and the Ministry of Commerce jointly issued the 2021 Negative List for Foreign Investment Access, which took effect on January 1, 2022. The updated list removes the automobile industry from the negative list. Foreign companies investing in the automobile industry are no longer subject to a 50 percent investment cap on the manufacture of all complete passenger vehicles and are not required to cap the number of joint ventures in China for the same production line.