Guiding the Direction of Foreign Investment Provisions

(Promulgated by the State Council on 11 February 2002 and effective as of 1 April 2002.)

Article 1: These Provisions are formulated in accordance with the stipulations of laws and regulations concerning foreign investment and the requirements of industrial policies of the State, in order to guide the direction of foreign investment and make it suitable for China's national economic and social development plans, and to facilitate the protection of the lawful rights and interests of the investors.

Article 2: These Provisions apply to projects for investment in and establishment of Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises (Foreign Investment Enterprises) as well as foreign investment projects in other forms within the People's Republic of China (Foreign Investment Projects).

Article 3: The Foreign Investment Industrial Guidance Catalogue and the Guiding Foreign Investment in the Dominant Industries of the Central and Western Regions Catalogue shall be formulated by the State Development Planning Commission, the State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation in conjunction with the relevant departments of the State Council, and shall be promulgated upon approval by the State Council. If the actual circumstances necessitate partial adjustment of the Foreign Investment Industrial Guidance Catalogue or the Guiding Foreign Investment in the Dominant Industries of the Central and Western Regions Catalogue, the State Economic and Trade Commission, the State Development Planning Commission and the Ministry of Foreign Trade and Economic Cooperation, in conjunction with the relevant departments of the State Council, shall revise the same at the appropriate time and promulgate the revised text.

The Foreign Investment Industrial Guidance Catalogue and the Guiding Foreign Investment in the Dominant Industries of the Central and Western Regions Catalogue shall be the basis for guiding the examination and approval of Foreign Investment Projects and the relevant policies applicable to Foreign Investment Enterprises.

Article 4: Foreign Investment Projects are divided into four categories: encouraged, permitted, restricted and prohibited.

Encouraged, restricted and prohibited Foreign Investment Projects are included in the Foreign Investment Industrial Guidance Catalogue. Foreign Investment Projects that do not fall into the encouraged, restricted or prohibited category are Foreign Investment Projects of the permitted category. Foreign Investment Projects of the permitted category are not included in the Foreign Investment Industrial Guidance Catalogue.

Article 5: Foreign Investment Projects of any of the following kinds shall be listed as encouraged Foreign Investment Projects:

1. those that involve new agricultural technology, overall agricultural development or the energy, communications or major raw material industry;

2. those that involve high and new technology or advanced appropriate technology, can improve product performance, enhance the technological and economic benefits of the enterprises or produce new equipment or new materials for which the domestic production capacity is insufficient;

3. those that meet market demand, can enhance product grades, open up newly developing markets or increase the international competitiveness of exports;

4. those that involve new technology or equipment that can save energy and raw materials or that enables the recycling or renewal of resources or the prevention and control of environmental pollution;

5. those that can bring into play the advantages of the central and western regions in terms of manpower and resources and that conform to the industrial policies of the State; or

6. those that are otherwise provided for in laws and administrative regulations of the State.

Article 6: Foreign Investment Projects of any of the following kinds shall be listed as restricted Foreign Investment Projects:

1. those that are technologically backward;

2. those that are disadvantageous to the reduced use of resources and the improvement of the ecological environment;

3. those that involve exploration for and/or mining of minerals that have been specially designated by the State as being subject to protected mining;

4. those that belong to industries that the State is gradually opening up to investment; or

5. those that are otherwise provided for in laws and administrative regulations of the State.

Article 7: Foreign Investment Projects of any of the following kinds shall be listed as prohibited Foreign Investment Projects:

1. those that jeopardize national security or harm the public interest;

2. those that cause pollution damage to the environment, destroy natural resources or damage human health;

3. those that occupy large tracts of cultivated land or are disadvantageous to the protection and development of land resources;

4. those that jeopardize the security or efficient use of military installations;

5. those that, in the production of products, apply techniques or technologies that are unique to China; or

6. those that are otherwise provided for in laws and administrative regulations of the State.

Article 8: With respect to Foreign Investment Projects, the Foreign Investment Industrial Guidance Catalogue may specify that they are "limited to equity and cooperative joint ventures", that "the Chinese parties shall hold a controlling interest" or that "the Chinese party shall hold a relative controlling interest".

The phrase "limited to equity and cooperative joint ventures" means that the only permitted form of the project in question is a Sino-foreign equity joint venture or a Sino-foreign cooperative joint venture. The phrase "the Chinese parties shall hold a controlling interest" means that the percentages of the Chinese parties' investments in the Foreign Investment Project shall add up to 51% or more. The phrase "the Chinese party shall hold a relative controlling interest" means that the sum of the percentages of the Chinese parties' investments in the Foreign Investment Project shall be higher than the percentage of the investment of any one foreign party.

Article 9: In addition to enjoying preferential treatment under relevant laws and administrative regulations, encouraged Foreign Investment Projects for the construction and/or operation of energy, transportation or urban infrastructure facilities (coal, petroleum, natural gas, electricity, railways, highways, ports, airports, urban roads, sewage treatment and garbage disposal facilities, etc.) with a large amount of investment and a long payback period may, upon approval, expand their scope of business related thereto.

Article 10: Permitted Foreign Investment Projects all the products of which are exported directly shall be regarded as encouraged Foreign Investment Projects. Restricted Foreign Investment Projects may be regarded as permitted Foreign Investment Projects if the sales amount of their product exports accounts for 70% or more of total product sales, subject to the approval of the people's government of the province, autonomous region, municipality directly under the central government or municipality with independent development plans, or the competent department of the State Council.

Article 11: Restrictions on permitted and restricted Foreign Investment Projects may be appropriately relaxed if such projects can truly bring into play the advantages of the central and western regions. Those of such projects that appear on the Guiding Foreign Investment in the Dominant Industries of the Central and Western Regions Catalogue shall be eligible for treatment under the preferential policies available to encouraged Foreign Investment Projects.

Article 12: Based on the current limits of examination and approval authority, Foreign Investment Projects shall be examined, approved and submitted for the record by the development planning departments or the foreign trade and economic cooperation departments, depending on the nature of the projects. The contracts for and articles of association of Foreign Investment Enterprises shall be examined, approved and submitted for the record by the foreign trade and economic cooperation departments. Those of the above-mentioned Foreign Investment Projects that are restricted projects of an amount below the approval limit shall be examined and approved by the corresponding competent department of the people's government of the province, autonomous region, municipality directly under the central government or municipality with independent development plans, which department shall additionally submit the same for the record to the superior competent department and the department in charge of the industry concerned; the power to examine and approve these projects may not be delegated. Foreign Investment Projects in the service sector that are gradually being opened up to investment shall be examined and approved in accordance with the relevant provisions of the State.

With regard to Foreign Investment Projects involving quotas or licences, a prior application for the quota or licence must be made to the departments in charge of foreign trade and economic cooperation.

If laws or administrative regulations contain other provisions concerning the arrangements and procedures for the examination and approval of Foreign Investment Projects, such provisions shall be followed.

Article 13: Foreign Investment Projects that have been examined and approved in violation of these Provisions shall be cancelled by the superior examination and approval departments within 30 working days of the date of their receipt of the projects' documents submitted for the record. The contracts for and articles of association of such projects shall be void, the enterprise registries shall not grant registration and Customs shall not carry out import and export procedures.

Article 14: If the applicant(s) for a Foreign Investment Project obtained approval of the project by improper means such as fraud, legal liability shall be pursued in accordance with the law depending on the seriousness of the circumstances; the examination and approval authority shall revoke the approval of the project and the relevant authorities in charge shall appropriately deal with the matter in accordance with the law.

Article 15: In case of abuse of office or dereliction of duty by personnel of examination and approval authorities, their criminal liability shall be pursued according to law pursuant to the provisions of the Criminal Law concerning the crimes of abuse of office and dereliction of duty. If the abuse of office or dereliction of duty does not constitute a criminal offence, the said personnel shall be subjected to administrative sanctions ranging upwards from the recording of a major demerit.

Article 16: Investment projects established by investors that are overseas Chinese or from the Hong Kong Special Administrative Region, the Macao Special Administrative Region or Taiwan shall, mutatis mutandis, be handled in accordance with these Provisions.

Article 17: These Provisions shall be implemented as of 1 April 2002. The Guiding the Direction of Foreign Investment Tentative Provisions approved by the State Council on 7 June 1995 and promulgated by the State Planning Commission, the State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation on 20 June 1995 are repealed with effect from the same date.