*Updated January 9th, 2012*

On Thursday, December 29th, 2011, China’s economic planning agency, the National Development and Reform Commission (NDRC), published its latest foreign investment catalog. The catalog, updated every four years, serves as a reference guide for China’s other state agencies in shaping future legislation, providing broad guidelines which can then be implemented in new legislative policies on the state or local levels. The catalog classifies industries into three broad categories, those industries in which foreign investment is: “encouraged”; “restricted”; or “prohibited”.

This latest revision of the foreign investment guidelines sees an overall increase in the number of industries in which the Chinese government supports direct foreign investment, while certain industries which . Among the more significant changes in the 2011 catalog were the NRDC’s decisions to: remove the auto manufacturing industry from its “encouraged” category; and the addition of several new-energy related fields to those “encouraged” by the government. International reaction to these amendments was colored by a great deal of speculation regarding the future of the Chinese auto industry and the role which foreign companies will take in coming years as well as exploration of the potential new avenues for foreign investment in the burgeoning new-energy field.

Recent years have seen the meteoric rise of the Chinese auto industry, buoyed by China’s overtaking the United States to become the world’s largest car market in 2009. However, despite this marked increase in local demand, the Chinese car market continues to be dominated by foreign auto makers, with seven of the country’s top ten auto manufacturers being either fully foreign owned or foreign-led joint-ventures in 2010. Furthermore, the phasing out of a series of incentive programs has resulted in a reduction of the growth rate of the Chinese auto market from a record breaking 32% in 2010 to a mere 3% in 2011.

As a result, the NRDC’s decision to cease encouragement of foreign investment in traditional auto manufacturing has been widely interpreted as a sign of the Chinese government’s growing concern over the fate of domestic auto makers. Though China has over 70 established domestic automakers, the bottom 55 account for a mere 11% of total vehicle sales in China signaling a significant imbalance in the production capacity of the domestic industry, one which is largely restricted to a handful of major companies.

While these new restrictions represent a clear effort on the state’s behalf to promote the growth of domestic companies, they are not expected to notably alter the composition of the market as established foreign automakers seem unlikely to leave the booming Chinese market. Furthermore, many industry analysts doubt whether the domestic Chinese auto manufacturing industry could make up for the loss of the economic boost provided by the export of foreign owned brands. The most notable impact of the restrictions will most likely be that of hindering new entrants to the Chinese market.

Although these new guidelines place added restrictions on investment in the manufacturing of whole vehicles, the manufacturing of engines and other key components as well as R&D on key technologies continue to be encouraged by the government. Furthermore, the addition of batteries for electric vehicles and electric motors to the “encouraged” category have served to boost the fully-electric and hybrid vehicle plans of several foreign manufacturers, including: Ford, General Motors and Volkswagen.

The Chinese government’s support of green-economy related industries was also apparent in the NRDC’s move to promote foreign investment in the broader new-energy field. The NRDC will now promote direct foreign investment in a variety of fields which advance various elements of low-carbon development. These include new-energy related service industries such as those concerned with EV charging and battery swapping operations.

The NRDC’s support of foreign investment in the burgeoning field of new-energy came as little surprise to analysts as it confirmed the government’s commitment to the development of a green economy, a goal which was strongly emphasized in the country’s 12th Five Year Plan. These new-energy related goals include establishing a fleet of one million electric vehicles in China by 2015 and, as such, will provide significant investment support for companies seeking to develop related technology such as electric vehicle batteries and charging services. While the full impact of these new guidelines will remain uncertain for some time, the ultimate bearing which they have on the course of low-carbon development in the country will certainly prove positive.

Read more: Analysis of the updated catalog by the WSJ

BBC News article

Analysis on recent trends in the Chinese auto market at Ad Age

Analysis of the impact on foreign automakers at China Car Times

Business Week report on the restrictions

Bloomberg article on foreign auto makers’ reactions to the restrictions

China Daily article on the state of foreign-led joint-ventures

Article on the developments in the India Times

Top 10 car makers in China

China Daily article detailing recent developments

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