China no longer wants foreign-funded construction and automobile factories, or coal, chemical and poly silicon plants. Instead the government is looking to encourage foreign investment in biotechnology and high-end equipment manufacturing, as well as hospitals and financial leasing firms.

The National Development and Reform Commission (NDRC), China’s economic planning agency, recently published its updated 'catalogue of guidance for foreign investment', outlining sectors where foreign investors will be encouraged, restricted or banned. Figuring chiefly within this guideline is China’s focus on fostering a competitive advantage by directing FDI flows into energy-saving ‘green’ businesses, such as battery recycling.

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“We want to promote a transformation of the manufacturing sector,” the NDRC stated in an official statement on its website. “High-end manufacturing is the key area that we are promoting foreign investment [in] to upgrade traditional industries. The amendments sponsor foreign investment into new technologies, new materials, new equipment and other technology[-related] items.”

Foreign investors have also been directed to focus on China’s services industry, reflecting the government’s intention to develop and modernise the sector. 

The revised guidelines, effective from January 30, 2012, form the basis of a range of policies related to foreign investment in China, from project approval to tax treatment. In a bid to “curb overcapacity in some sectors”, foreign investors, particularly in the automobile industry, will face new restrictions as several automobile investments have been removed from the encouraged investment category.

Nevertheless, in the government’s bid to promote the development of new strategic industries, there are opportunities for foreign investors operating in what the NDRC identifies as “emerging industries”, primarily those in the manufacturing sector.

“Foreign investment in China [poses] many challenges,” explained the NDRC. “From the domestic perspective, the [rapid increase] in the cost of factors of production [means] industrial restructuring and upgrading is urgent. These changes will optimise the structure of foreign investment, [enabling] us to improve the quality of foreign investment”.

FDI inflows have been a key driver of China's economic growth, but it remains to be seen if China’s revised guidelines will achieve the NDRC’s stated goal of creating “a favourable investment environment”.