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Encouraged Restricted and Prohibited Industries in China

May 27, 2016

This article has been prepared by our partners from 1421 Consulting Group.

 

One of the things a company needs to know before setting up their WFOE in China, is whether their business scope has any restrictions or is only allowed under special permits and regulations. The business scope of a company describes which activities will be performed by the entity in China. These are specified before having set up and need to be approved by the Chinese government. There are some business areas which have restrictions laid upon them, sometimes making the activities even prohibited for non-Chinese companies. In this article we would like to inform you about the encouraged, restricted and prohibited industries in China.

 

 

Already since 1995, the Ministry of Commerce (also known as the MOFCOM) of China has regularly published the Foreign Investment Catalogue. The latest iteration of the catalogue was in 2015 and shows which changes are happening in China. The catalogue is divided in 3 sectors:

 

  1. Encouraged Industries

    • The Chinese government is actively seeking foreign investments for these industries. Sometimes tax incentives, cheaper land costs and simplified approval procedures are granted to investors in these industries.

  2. Restricted Industries

    • On these industries, the government has imposed restrictions such as foreign shareholding ratio’s, special approvals requirements and limits on the operation of the company.

  3. Prohibited Industries

    • Companies operating in these industries are not allowed to have foreign investments.

 

As these terms might seem a bit abstract, we would like to give examples of each industry and the implications the MOFCOM laid upon them.

 

For Encouraged Industries, one can think of elderly care. Since China’s elderly population will rise tremendously over the next years and China is not ready for such a rapid increase in nursery demand, this industry is encouraged.  Foreign funded elderly homes can receive tax benefits and subsidies.

 

Restricted industries include foreign investment in Chinese High Schools, Pre-Schools and Tertiary Education. Since many Western recent graduates start as English teachers in China, setting up a school might seem like a good way of improving their career. The restriction means, however, that the institution which provides the education must be in a joint venture with a Chinese party. Not only that, but the school’s headmaster or chief administrator must be a Chinese national as well. Lastly, the Chinese party should account for at least half of the members of the board of directors. In layman terms, this means that a school cannot be set-up by foreigners alone and a Chinese partner must be found.

 

An example for a prohibited industry is the operation of antique stores and auction houses selling Chinese cultural relics. While this might seem logical that China wants to keep their sales of cultural relics in their own hands, there are other prohibited industries which might be more unexpected. Construction of golf courses and villa’s is an example of an industry which is prohibited in China as well, although one could have thought this would be legal.

 

Because the list is quite extensive and subject to revisions, we want give you the direct hyperlink. Our message to you is to check whether your industry is on this list. If it is not on there, for now the industry is “deemed as allowed”. With every version of the catalogue, one can see where opportunities and challenges lie in China.

 

This article has been prepared by 1421 Consulting Group, a management consultancy firm active in Beijing and Shenzhen and have supported many foreign SMEs with doing business in China. To visit the original article and get in contact with 1421 Consulting Group, please visit the article at http://www.1421.consulting/2016/05/encouraged-restricted-prohibited-industries-china/

 

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