2011 Investment Climate Statement - China

2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011

Openness to, and Restrictions upon, Foreign Investment


China attracted USD 95 billion in foreign direct investment (FDI) in 2009, second only to the United States. China's sustained high economic growth rate and the expansion of its domestic market help explain its attractiveness as an FDI destination. However, foreign investors often temper their optimism of potential investment returns with uncertainty about China's willingness to offer a level playing field to foreign investors in the long term. In addition, foreign investors face a range of difficulties related to China's current investment climate. These include a lack of transparency, weak intellectual property rights (IPR) protection, corruption, industrial policies that protect and promote local firms, and an unreliable legal system.

China has a legal and regulatory framework granting it the authority to promote investment in specific regions or industries it wishes to develop and to restrict foreign investment deemed not to be in its national interest or that might compete with state-condoned monopolies. Many regulations contain undefined key terms and standards and are applied in an inconsistent manner. Potential investment restrictions are much broader than those of many developed countries, including the United States.

Investment Policies

The Chinese government has stated that it welcomes foreign investment. In particular, China seeks to promote investment in higher value-added sectors, including high technology research and development, advanced manufacturing, clean energy technology, and select modern services sectors. Export-oriented investments also often receive government support. A major goal of China's investment policies is to encourage the domestic development of technological innovation and know-how. Investment projects that involve the transfer of technology or the potential for "indigenous innovation" tend to be favorably received by China's investment authorities. Foreign investors have said they must often weigh China's market potential and its interest in attracting technology against China's inability or unwillingness to protect investors' intellectual property.

China has indicated that it will consider restricting foreign investment in resource-intensive and highly-polluting industries, citing basic manufacturing as an example. In addition, China appears to discourage foreign investments in sectors: 1) where China seeks to develop domestic firms into globally competitive multinational corporations; 2) that have benefited historically from state-authorized monopolies or from a legacy of state investment; or 3) deemed key to social stability. It also discourages investments that are intended to profit from currency, real estate, or asset speculation.

China seeks to spread the benefits of foreign investment beyond its relatively wealthy coastal areas by encouraging foreign companies to establish regional headquarters and operations in Central, Western, and Northeastern China. China publishes and regularly revises a Catalogue of Priority Industries for Foreign Investment in the Central-Western Regions, which outlines incentives to attract investment in targeted sectors to those parts of China.

Five-Year Plan

China defines its broad economic goals through five-year macro-economic plans. The most significant of these for foreign investors is China's Five-Year Plan on Foreign Capital Utilization. The most recent version was released in November 2006 and promised greater scrutiny of foreign investment projects. The plan called on China to: 1) realize a "fundamental shift" from quantity to quality in foreign investment by 2010; 2) focus on introducing advanced technology, management expertise and talent; 3) pay attention to the environment and energy efficiency when evaluating investments for government approval; 4) restrict foreigners' acquisition of "dragon head" enterprises (i.e., premier Chinese firms); 5) prevent the "emergence or expansion of foreign capital monopolies;" 6) protect "national economic security," particularly "industrial security;" and 7) prevent the "abuse of intellectual property rights protection not favorable to the indigenous innovation of Chinese enterprises." The next plan is expected to be released in 2011.

Catalogue for the Guidance of Foreign Investment in Industries

China outlines its specific foreign investment objectives primarily through its Catalogue for the Guidance of Foreign Investment in Industries, most recently revised in 2007. China expects to publish an updated catalogue in 2011.

According to Chinese officials, the catalogue is a static document. It is intended as a snapshot of policies in place at a given time, subject to revision at the government's discretion and supplemented by directives from various government agencies. The catalogue serves to help foreign investors understand China's complex industrial policy by delineating sectors of the economy where foreign investment is "encouraged," "restricted" and "prohibited." Investment in sectors not listed in the catalogue is considered permitted. China "encourages" investment in sectors where it believes it will benefit from foreign assistance or technology. Investment is "restricted" (often including equity caps that limit foreign ownership to a minority share) and "prohibited" in sectors that China deems sensitive, touch on national security, or do not meet the goals of China's economic development plans.

Problems with the Catalogue

Foreign investors have expressed frustration that China does not systematically seek public input before updating the catalogue and offers little rationale for changes, although China has committed to doing so before finalizing the 2011 update. Chinese regulators are not bound to follow the catalogue and instead maintain the flexibility to ignore its guidance and restrict or approve foreign investment for other reasons. Even in encouraged and permitted sectors, regulations apart from the catalogue often specify additional restrictions on the specific forms of investment that are allowed. China may also adopt new regulations or make unannounced policy decisions that supersede the most recently published edition of the catalogue.

Contradictions between the catalogue and other measures have confused investors and added to the perception that investment guidelines do not provide a secure basis for business planning. Uncertainty as to which industries are being promoted and how long such designations will be valid undermines confidence in the stability and predictability of the investment climate. As a consequence, the practical implications of listing a sector in a given category are uncertain.

China’s Foreign Investment Approval Regime

According to the Interim Measures for the Administration of Examining and Approving Foreign Investment Projects, issued in October 2004 and still in effect, all proposed foreign investments in China must be submitted for approval to the National Development and Reform Commission (NDRC) or to provincial or local Development and Reform Commissions, depending on the sector and value of the investment. NDRC's approval process includes assessing the project's compliance with China's laws and regulations, its national security implications, and its economic development ramifications. In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and "consulting agencies," which may include industry associations that represent domestic firms. The State Council may also weigh in for high-value projects in "restricted" sectors.

Once NDRC approves a project, investors apply to the Ministry of Commerce (MOFCOM) for approval to legally establish a company. Foreign investors next apply for a business license from the State Administration of Industry and Commerce (SAIC), which allows the firm to operate. Once a license is obtained, the investor registers with China's tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China's Environmental Protection Ministry and its Ministry of Land Resources.

Mergers and Acquisitions and the Anti-Monopoly Law

MOFCOM (or, depending on the sector and value of the investment, the provincial or local Department of Commerce) reviews all proposed mergers and acquisitions (M&A) by foreign investors. The Anti-Monopoly Law (AML) allows antitrust regulators to make decisions based on factors other than consumer welfare. The AML states that China will protect the "lawful activities" of state-regulated monopolies and does not clearly resolve whether state-owned enterprises (SOEs) are otherwise subject to the law's competitive provisions. The law states that China will set up a national security review process for proposed foreign M&A of Chinese firms, which China expects to establish in 2011.

The Regulations Concerning Foreign Investors Acquiring Domestic Enterprises instruct regulators to consider an M&A's potential impact on "national economic security" when evaluating a transaction. Foreign M&A transactions that result in "actual control" of a domestic enterprise in a "key industry" or of a "famous trademark" or Chinese "time-honored brand" are examined more closely.

As of December 2010, MOFCOM had reviewed over 140 M&A transactions, approving 95 percent unconditionally and approving six transactions with conditions. All six M&A cases approved with conditions involved offshore transactions between foreign parties. MOFCOM rejected one transaction: Coca-Cola's bid to buy Chinese juice-maker Huiyuan.

Problems with China's Foreign Investment Approval Regime and the Anti-Monopoly Law

All proposed foreign investments in China are evaluated on a case-by-case basis, allowing significant discretion on the part of Chinese regulators to impose unexplained restrictions on new investment projects and to take into account the interests of domestic competitors. This ad hoc system diminishes the transparency of China's investment regulations and adds to investor uncertainty.

AML implementation also suffers from a lack of decision-making transparency. MOFCOM decisions to block or conditionally clear proposed M&A transactions are the only administrative decisions required to be publicized, so the majority of MOFCOM reviews have left no public record. MOFCOM's published decisions are brief and offer little substantive analysis. China's courts have been reluctant to take AML cases involving China's largest SOEs.

Investment Restrictions in "Vital Industries and Key Fields"

The December 2006 Guiding Opinions Concerning the Advancement of Adjustments of State Capital and the Restructuring of State-Owned Enterprises called on China to consolidate and develop its state-owned economy, including enhancing its control and influence in "vital industries and key fields relating to national security and national economic lifelines." The document defined "vital industries and key fields" as "industries concerning national security, major infrastructure and important mineral resources, industries that provide essential public goods and services, and key enterprises in pillar industries and high-tech industries."

The Chairman of the State-owned Assets Supervision and Administration Commission (SASAC), when the document was published, listed industries in which the state should maintain "absolute control" (aviation, coal, defense, electric power and the state grid, oil and petrochemicals, shipping, and telecommunications) and "relative control" (automotive, chemical, construction, exploration and design, electronic information, equipment manufacturing, iron and steel, nonferrous metal, and science and technology). China maintains that these lists do not reflect its official policy.

China's State Assets Law is intended to safeguard China's economic system, promote the "socialist market economy," fortify and develop the state-owned economy, and enable SOEs to play a leading role in China's economy, especially in "vital industries and key fields." The law requires China to adopt policies to encourage SOE concentration and dominance in industries vital to national security and "national economic security."

Additional Laws Related to Foreign Investment

China's State Secrets Law gives the government broad authority to classify information as a “state secret,” creating uncertainty and potential risk for investors negotiating with SOEs or operating in sensitive sectors. The Contract Law encourages contractual compliance by providing legal recourse, although enforcement of judgments continues to be a problem. Additional investment-related laws include but are not limited to: the Administrative Permissions Law; the Arbitration Law; the Corporate Income Tax Law; the Enterprise Bankruptcy Law; the Foreign Trade Law; the Government Procurement Law; the Insurance Law; the Labor Contract Law; the Law on Import and Export of Goods; and the Securities Law.


The following table lists China's most recent rankings by organizations that monitor economies' economic freedom, business regulations, and perceived level of corruption.





Transparency International Corruption Perceptions Index




Heritage Foundation and Wall Street Journal Index of Economic Freedom




World Bank Ease of Doing Business Index




Millennium Challenge Corporation (MCC) Government Effectiveness Indicator




MCC Rule of Law Indicator




MCC Control of Corruption Indicator




MCC Fiscal Policy Indicator




MCC Trade Policy Indicator




MCC Regulatory Quality




MCC Business Start-Up Indicator




MCC Land Rights and Access Indicator




MCC Natural Resource Management




*The rank given for each MCC indicator represents China's percentile ranking in its income peer group (i.e., Lower Middle Income Countries): 0% is worst; 50% is the median; 100% is the best.

Conversion and Transfer Policies

To open and maintain foreign exchange accounts, foreign-invested enterprises must apply to China's State Administration of Foreign Exchange (SAFE). SAFE determines the amount of foreign exchange the enterprise needs. Enterprises authorized to conduct current account transactions can retain foreign exchange equal to 50 percent of export earnings. Deposits above the limit SAFE sets must be converted to local currency.

Foreign exchange transactions on China's capital account require a case-by-case review, and approvals are tightly regulated. Several foreign firms have noted difficulties in receiving government approval to bring in foreign capital to expand their businesses.

The Chinese government registers all commercial foreign debt and limits foreign firms' accumulated medium and long-term debt from abroad to the difference between total investment and registered capital. Foreign firms must report their foreign exchange balance twice per year.

Expropriation and Compensation

Chinese law prohibits nationalization of foreign-invested enterprises except under "special" circumstances. Chinese officials have said these circumstances include national security and obstacles to large civil engineering projects, but the law does not define the term. Chinese law requires compensation of expropriated foreign investments but does not describe the formula to be used in calculating the amount. The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, though the Department has notified Congress of several cases of concern.

Dispute Settlement

Chinese officials typically urge firms to resolve disputes through informal conciliation. If formal mediation is necessary, Chinese parties and the authorities typically promote arbitration over litigation. Many contracts prescribe arbitration by the China International Economic and Trade Arbitration Commission (CIETAC). Some foreign parties have obtained favorable rulings from CIETAC, while others question CIETAC's procedures and effectiveness. Other arbitration commissions exist and are usually affiliated with the government at the provincial or municipal levels. For contracts involving at least one foreign party, offshore arbitration may be adopted.

Formal commercial disputes between investors are heard in economic courts. China's court system is not independent of the government, and the government often intervenes in disputes. Corruption may also influence local court decisions and local officials may disregard the judgments of domestic courts. China's legal system rarely enforces foreign court judgments.

Investor-state disputes leading to arbitration are rare in China. China has never lost an arbitration case resulting from an investment dispute. China is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

Performance Requirements and Incentives

China has committed to eliminate export performance, trade and foreign exchange balancing, and local content requirements in most sectors. China has also committed to enforce only technology transfer rules that do not violate World Trade Organization (WTO) standards on intellectual property and trade-related investment measures.

In practice, however, local officials and some regulators prefer investments that develop favored industries and support the local job market. In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose intellectual property content or license it to competitors, sometimes at below market rates.

Many localities – including special economic zones, development zones and science parks – court foreign investors with packages of reduced income taxes, resource and land use fees, and import/export duties, as well as priority treatment in obtaining basic infrastructure services, streamlined government approvals, and funding support for start-ups. These packages may also stipulate export, local content, technology transfer, or other requirements.

Right to Private Ownership and Establishment

In China, all commercial enterprises require a license from the government. There is no broad right to establish a business. Disposition of an enterprise is also tightly regulated.

The Administrative Permissions Law requires reviews of proposed investments for conformity with Chinese laws and regulations and is the legal basis for China's complex approval system for foreign investment.

Protection of Property Rights

The Chinese legal system mediates acquisition and disposition of property. Chinese courts have an inconsistent record in protecting the legal rights of foreigners.

Tangible Property Rights

All land in China is owned by the state. Individuals and firms, including foreigners, can own and transfer long-term leases for land, structures, and personal property, subject to many restrictions. China's Property Law stipulates that residential property rights will be automatically renewed while commercial and industrial grants shall be renewed absent a conflicting public interest. A number of foreign investors have seen their land-use rights revoked as neighborhoods are slated by the government for development. Investors report compensation in these cases has been nominal.

China's Securities Law defines debtor and guarantor rights and allows mortgages of certain types of property and other tangible assets, including long-term leases as described above. Foreigners can buy non-performing debt through state-owned asset management firms, but bureaucratic hurdles limit their ability to liquidate assets.

Intellectual Property Rights

China acceded to the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2007. China is also a member of the Paris Convention for the Protection of Industrial Property, Berne Convention for the Protection of Literary and Artistic Works, Madrid Trademark Convention, Universal Copyright Convention, and Geneva Phonograms Convention, among other conventions.

China has updated many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS). However, in 2009 a WTO dispute settlement panel found that some aspects of China’s IPR regime are inconsistent with its obligations under TRIPS. Industry associations representing software, entertainment, and consumer goods continue to report high levels of piracy in China. Trademark and copyright violations are widespread. In general, criminal penalties for infringement are seldom applied, while administrative sanctions are typically non-transparent and so weak as to lack a deterrent effect. Civil sanctions also tend to be of limited effect.

Significant regional differences exist in infringement and enforcement, with some areas showing higher levels of protection of IPR and others apparently offering safe harbors to local counterfeiters and pirates. While many Chinese officials are increasing enforcement efforts, violations also generally continue to outpace enforcement. Lack of coordination among various government agencies also continues to hamper many enforcement efforts.

Transparency of the Regulatory System

China's legal and regulatory system is complex and contradictory and generally lacks consistent enforcement. Foreign investors rank inconsistent and arbitrary regulatory enforcement and lack of transparency among the major problems they face in China's market.

The State Council's Legislative Affairs Office (SCLAO) posts proposed regulations and many draft rules on its website for public comment, though usually for less than 30 days. Central government ministries and agencies have increased the number of draft trade and economic-related departmental rules made available on their own ministry websites for public comment, but comment periods can be extremely brief and the impact of public comments on final regulations is not clear. Foreign investors report that Chinese regulators at times rely on unpublished internal guidelines that affect their businesses. SCLAO has issued instructions to Chinese agencies to publish all foreign trade and investment related laws, regulations, rules, and policy measures in the MOFCOM Gazette, in accordance with China's WTO accession commitment.

Efficient Capital Markets and Portfolio Investment

Bank loans continue to provide the vast majority of credit in China, although other sources of capital, such as corporate bonds, equity financing and private equity financing are expanding their scope, reach and sophistication. Recently, regulators have used administrative methods to attempt to limit overall credit following a government-encouraged dramatic expansion of lending in 2008-2009 to combat the impact of the global financial crisis on China's economy.

The People's Bank of China (PBOC), China's central bank, continues to maintain a floor on lending rates that is 2-3 percentage points above the ceiling on deposit rates, thereby preserving a healthy profit margin on bank loans. The ceiling on deposit interest rates has consistently been below the rate of inflation in recent years, making real interest rates negative. The result is a net flow of capital from depositors to banks. Favored borrowers, particularly SOEs, benefit from what is effectively subsidized capital. Small- and medium-sized firms, by contrast, experience the most difficulty obtaining bank financing, instead financing investments through retained earnings or informal channels.

Non-bank financing has expanded over the last few years, with increasing numbers of Chinese firms opting to seek capitalization by publicly listing their stock, either inside or outside of China. Most foreign portfolio investment in Chinese companies occurs on foreign exchanges, primarily in New York and Hong Kong. In addition, China permits limited access to Renminbi-denominated markets for portfolio investment by certain foreign institutional investors. Direct portfolio investment by private equity and venture capital firms is also rising rapidly, although from a small base.

Competition from State Owned Enterprises

China's leading SOEs benefit from preferential government policies and practices aimed at developing bigger and stronger national champions. SOEs enjoy administrative monopolies over the most essential economic inputs (hydrocarbons, finance, telecoms, electricity) and considerable power in the markets for others (steel, minerals). SOEs have long enjoyed preferential access to credit. Provincial governments have reportedly used their power to deny operating licenses to persuade reluctant owners to sell out to bigger state-owned suitors.

China has two sovereign wealth funds: The China Investment Corporation (CIC) and SAFE. CIC is overseen by a board of directors and a board of supervisors. SAFE is a government agency that reports directly to the PBOC. The SAFE Administrator serves concurrently as a PBOC Vice Governor. CIC and SAFE invests a very limited amount of their funds domestically. The funds are required neither to submit their books to independent audit nor to publish annual reports, although CIC issued its first annual report in 2009.

Corporate Social Responsibility

Corporate social responsibility (CSR) is a new and still relatively unknown concept for most Chinese, though CSR awareness appears to be rising among younger and more affluent consumers. The 2008 Sichuan earthquake led many Chinese to recognize the contributions of enterprises to earthquake relief efforts, and an increasing number of press reports highlight the importance of enterprises' labor and environmental CSR commitments. Large Chinese SOEs and large foreign-invested enterprises tend to follow generally accepted CSR principles, and most report annually on their CSR policies and achievements.

Political Violence

The risk of political violence directed at foreign companies operating in China remains small. Some violent but unconnected protests have occurred in parts of China, but such mass incidents generally involved local residents protesting corrupt officials, environmental and food safety concerns, and confiscated property.


Corruption remains endemic in China. Sectors requiring extensive government approval are most affected, including banking, finance and construction. The lack of an independent press as well as the fact that all bodies responsible for conducting corruption investigations are controlled by the Communist Party hamper anti-corruption efforts. Senior officials and family members are suspected of using connections to avoid investigation or prosecution for alleged misdeeds.

According to Chinese law, accepting a bribe is a criminal offence with a maximum punishment of life in prison or death in "especially serious" circumstances. The maximum punishment for offering a bribe to a Chinese official is five years in prison, except when there are "serious" or "especially serious" circumstances, when punishment can range from five years to life in prison. It is currently not a crime under Chinese law to bribe a foreign official. A draft amendment to the Penal Code under consideration would make offering bribes to foreign officials or officials of international organizations a punishable offense, with punishment ranging from three to ten years in prison plus fines.

The Supreme People's Procuratorate and the Ministry of Public Security investigate criminal violations of laws related to anti-corruption, while the Ministry of Supervision and the Communist Party Discipline Inspection Committee enforce ethics guidelines and party discipline. China's National Audit Office also inspects accounts of state-owned enterprises and government entities.

China ratified the United Nations Convention against Corruption in 2005 and participates in Asia-Pacific Economic Cooperation (APEC) and Organization for Economic Cooperation and Development (OECD) anti-corruption initiatives. China has not signed the OECD Convention on Combating Bribery.

Bilateral Investment Agreements

China has bilateral investment agreements with 130 countries, including Austria, the Belgium-Luxembourg Economic Union, France, Germany, Italy, Japan, South Korea, Spain, Thailand and the United Kingdom. China's bilateral investment agreements cover expropriation, arbitration, most-favored-nation treatment, and repatriation of investment proceeds. They are generally regarded as weaker than the investment treaties the United States seeks to negotiate. The United States does not have a bilateral investment agreement with China. The United States and China concluded a bilateral taxation treaty in 1984.

OPIC and Other Investment Insurance Programs

The United States suspended Overseas Private Investment Corporation (OPIC) programs in the aftermath of China's violent crackdown on Tiananmen Square demonstrators in June 1989. OPIC honors outstanding political risk insurance contracts. The Multilateral Investment Guarantee Agency, an organization affiliated with the World Bank, provides political risk insurance for investors in China. Some foreign commercial insurance companies also offer political risk insurance, as does the People's Insurance Company of China.


Human resource issues remain a major concern for American companies operating in China. Difficulties in hiring appropriately skilled labor, navigating new and comprehensive labor and social safety net laws, the restriction on the mobility of workers, and the lack of independent trade unions combine to create a challenging environment for foreign-invested enterprises.

The cost and availability of labor in China has varied in the past few years. Some of south China's manufacturing centers have experienced localized labor shortages. Skilled workers remain in short supply.

Independent trade unions are illegal in China. Officially sanctioned trade unions must affiliate with the All-China Federation of Trade Unions (ACFTU), which is an arm of the Communist Party. It is illegal for employers to oppose efforts to establish ACFTU unions. While worker protests and work stoppages occur regularly, the right to strike is not protected in law.

China has not ratified core International Labor Organization conventions on freedom of association and collective bargaining, but has ratified conventions prohibiting child labor and employment discrimination. Apart from a lack of freedom of association and the right to strike, Chinese labor laws generally meet international labor standards. However, enforcement of existing labor regulations is poor.

Foreign Trade Zones/Free Trade Zones

China's principal free trade zones include Dalian, Guangzhou, Hainan, Shanghai, and Tianjin. Besides these official duty-free zones, numerous economic development zones and open cities offer similar privileges and benefits to foreign investors.

Foreign Direct Investment Statistics

Data Limitations

Investment from and to some economies, including but not limited to the British Virgin Islands, the Cayman Islands, Hong Kong, and Macau may mask the ultimate source/destination of the investment. Some analysts have noted that investment from and to Taiwan may be underreported.

Chinese FDI data do not include much of the high dollar-value minority equity stakes that American financial services firms have taken in major Chinese lenders. In addition, China does not classify reinvested locally-generated profits as new investment.

FDI as a Percentage of Gross Domestic Product

According to the United Nations Conference on Trade and Development, China's FDI stock equaled 10 percent of its gross domestic product (GDP) in 2009; China's FDI inflows equaled 2 percent of GDP.

Foreign Direct Investment Flows for 2009 (Top 10 Sources of Origin)

Country/Economy of Origin

Millions of U.S. Dollars

Hong Kong


British Virgin Islands






South Korea


Cayman Islands


United States








Source: China Commerce Yearbook 2010

Cumulative* Foreign Direct Investment for 2009 by Selected Source of Origin

Country/Economy of Origin

Millions of U.S. Dollars

Hong Kong


British Virgin Islands




United States




South Korea




Cayman Islands


United Kingdom




Source: China Commerce Yearbook 2010

*Cumulative values are totals of the data collected each year, are not adjusted for inflation, and do not account for divestment.

Flow of Outbound Direct Investment for 2009 (Top 10 Destinations)


Millions of U.S. Dollars

Hong Kong


Cayman Islands






British Virgin Islands




United States








Source: China Commerce Yearbook 2010

Stock of Outbound Direct Investment for 2009 (Top 10 Destinations)


Millions of U.S. Dollars

Hong Kong


British Virgin Islands


Cayman Islands






United States




South Africa






Source: China Commerce Yearbook 2010

Selected Major Foreign Direct Investments by U.S. Companies


Estimated Current Value in Billions of U.S. Dollars









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