China's Restricted Industries: Foreign Investment Regulations, Structures and Opportunities

It is generally accepted that China is a complex and sometimes difficult place to do business. To succeed it is necessary to understand more than just the basic business issues and legal risks. There are a variety of political and social issues, influences, changes in policy direction that are also important. The rules are constantly changing. Obtaining a clear grasp of the many moving parts involved in PRC business can make a real difference.

Over the last decade there has been transformation in the PRC legal environment with restrictions on many industries being relaxed as China has modernised and become a member of the global buisness community.  It is important to remember however that the vast majority of such changes resulted directly from commitments made by the PRC when it joined the World Trade Organization. There is no reason to think that the rate of reform across broad industries that we have seen over the last ten years will continue over the next decade. On the contrary, it is likely that China will become more selective in the industries that it promotes and that further reform will be dictated by numerous factors that will go significantly beyond the need to create a 'level playing field' for foreign investors.

Access to many new business areas will not necessarily be straightforward. It will be essential to identify the pressures and trends that are building and shaping China's policy going forward. The starting point is to understand  that change in China has not reduced the role of government and that some industries will remain restricted or even prohibited. Over the next decade investors need to identify what industry and business areas are likely to be given priority and where opportunities may perhaps be closed or may otherwise decline in importance.  

Any plans to engage in a business connected to restricted industries should always be approached with caution and with a view to working within the existing legal framework, rather than accepting business structures that are clearly illegal. Where there are uncertainties and issues that are open to interpretation, investors need to have a clear understanding of the risks involved and the ways in which these can be reduced to the fullest extent possible. Any investor looking to work in sensitive or restricted industries needs to understand the broader policy objectives, industry background issues as well as the pure legal framework. 

The discussion that follows seeks to encourage a broader understanding of the influences shaping the prospects for future investment. It also examines those areas that are problematic or highly regulated as there are often multiple alternatives available to investors, particularly in areas that are restricted. Some of these alternatives are high risk. Other approaches may often require a little more creativity effort and subtlety to put in place, resulting less risky, longer lasting business structures that are compliant with the laws.