Laws of the People's Republic of China

The 11th Five-year Plan on Foreign Capital Utilization

The State Development and Reform Commission November 10, 2006 Preamble

The 11th Five-year Plan on Foreign Capital Utilization£¬which is an important part of the 11th Five-year Plan of China's national economic and social development, based on making a summary of the overall situation of the 10th Five-year Plan on Foreign Capital Utilization and analyzing the domestic and foreign environments that the 11th Five-year Plan faces, puts forward the guiding ideology, strategic objective, key tasks, corresponding policy measures for foreign capital utilization in China for the 11th Five-year Plan, and is an important guideline of the foreign capital utilization work of China during the 11th Five-year Plan.

During the 11th Five-year Plan, we shall, for the sake of the work of the foreign capital utilization, comprehensively implement the scientific view of development, further propel the fundamental conversion of the foreign capital utilization from "being quantity oriented" to "being quality oriented", practically transfer the emphasis of foreign capital utilization from making up the shortage of funds and foreign exchanges to introducing advanced technologies, management experiences and high-quality talents, focus more on ecological construction, environmental protection, conservation and comprehensive utilization of resources and energies, and effectively combine the foreign capital utilization with the upgrading of domestic industrial structure and technological level.

In accordance with the plan consented to by the State Council on formulating special planning, and based on widely soliciting opinions from 40 related ministries, commissions and directly subordinate institutions under the jurisdiction of the State Council containing the Ministry of Foreign Affairs, the Ministry of Finance, the Ministry of Commerce, the People's Bank of China, 11 industrial associations, the local departments of development and reform as well as some research institutions, enterprises, experts and scholars, this Plan is formulated by the State Development and Reform Commission.

Contents 1. Basic Information on Foreign Capital Utilization of China during the 10th Five-year Plan

2. Guiding Ideology and Overall Strategic Objective of Foreign Capital Utilization of China during the 11th Five-year Plan

3. Major Tasks of Foreign Capital Utilization of China during the 11th Five-year Plan

(1) Guiding the industrial structure optimization and upgrading of foreign investments

(2) Promoting the construction of a resource-conservative and environment-friendly society

(3) Propelling the opening up of service industries to the outside world actively and prudently

(4) Promoting the construction of an opener independent system of innovation

(5) Promoting harmonious development of the regional economies

(6) Realizing diversification of the methods of foreign capital utilization

(7) Improving the quality and returns of the utilization of foreign loans

(8) Strengthening the macro-monitoring and full-aperture administration of foreign debts

4. China's Policy Measures for Foreign Capital Utilization during the 11th Five-year Plan

(1) Constructing a fairer and sounder foreign investment¡¡environment

(2) Intensifying the policy guidance to foreign investment industries and to the contribution thereof to selected regions

(3) Intensifying the implementation of resource conservation and environmental protection

(4) Guiding various forms of technical cooperation and united innovations of domestic and foreign funds

(5) Further strengthening the foreign loan borrowing administration

(6) Improving the level of the monitoring, control and management of the foreign debt risks

(7) Maintaining state economic security and public interests

(8) Actively taking part in formulating and coordinating international economic rules

The 11th Five-year Plan is a significant when the economic and social development of China serves as a link between the past and future. With the domestic and foreign environmental changes that China faces as well as the wider opening up to the outside world, the main purposes of the foreign capital utilization will be changed, and the philosophy, means, key industries, regional structure, etc. of the foreign capital utilization will also change greatly. To actively and effectively utilize foreign capital, and to practically transfer the emphasis to the introduction of foreign advanced technologies, management experiences and high-quality talents, are the key points for improving the quality of foreign capital utilization during the 11th Five-year Plan .

1.

Basic Information on Foreign Capital Utilization of China during the 10th Five-year Plan

During the 10th Five-year Plan, marked by the entry into WTO, the opening up to the outside world of China has entered a completely new stage of fully taking part in international economic cooperation and competition, and the foreign capital utilization has also walked onto a new step. During the 10th Five-year Plan, a total of approximately USD 383 billion foreign capital was actually utilized in China , of which approximately USD 286 billion was foreign direct investments, approximately USD 38 billion was raised by issuing stocks overseas, and approximately USD 46 billion was foreign loans. The amount has far exceeded the actually completed amount during the of the 9th Five-year Plan. The main features are as follows:

(1)

The scale of foreign investments has been extended, and the investment methods have been more diversified. In terms of foreign direct investments, during the 10th Five-year Plan, the utilization of foreign direct investments has increased by 34% over that during the 9th Five-year Plan. China has become one of the major destination countries of international capital and transnational companies' investments. In respect of other foreign investments mainly through raising funds of overseas stocks, great progress has been made. By the end of 2005, 122 companies from the Mainland have been listed in Hong Kong and other stock exchanges overseas, and a total of USD 55,544 million funds have been raised (excluding red chip enterprises). A total of 34 overseas institutions are admitted as qualified foreign institutional investors (QFII).

(2)

We have made prominent achievements in undertaking a new round of international manufacturing industry transfer. During the 10th Five-year Plan, China grasped the opportunities of structural adjustment and transfer of global manufacturing industry successfully, brought in large amounts of foreign direct investments in the manufacturing industry, and thus has become one of the important bases of production in the world preliminarily. The foreign investments that were absorbed in fund-intensive and technology-intensive industries obviously increased, and many large foreign-invested projects that had been prepared for years were carried out during the 10th Five-year Plan. Foreign-invested enterprises played good exemplary roles in respect of technology, management and the philosophy of business operation, etc., propelled the market forces and internalization of China's economy and enterprises, promoted the formulation of a group of fresh industries with international competitiveness including electronic information, integrate circuit, light industry, textiles, household electrical appliances, common mechanical and electrical products, and so on..

(3)

With the entirely implementation of the promises for China's entry into WTO in the service industry, apparent progress has been made in the opening up to the outside world. By the end of 2005, a total of 71 foreign banks from 20 countries and regions have set up 238 business operative institutions in China. More than ten Chinese-invested commercial banks containing China Construction Bank, Bank of China, Industrial and Commercial Bank of China brought in overseas strategic investments, and at the same time China Construction Bank and Bank of Communications were successfully listed overseas. A total of 4 joint venture securities companies and 20 joint venture fund management companies were set up upon approval. On the basis of the promises for entry into WTO, the insurance industry has been opened to foreign-invested insurance companies in all regions and in all businesses except related statutory insurances. By the end of 2005, the number of foreign-invested insurance companies has increased to 40 companies and 93 head companies and branches. Foreign-invested enterprises have become an important part in the fields of logistics and commerce. In 2005, the foreign capital utilized in the service industry of China exceeded one fifth of the total amount of foreign investments in the year.

(4)

Foreign loans increased steadily, which supported the construction of state key projects effectively. During the 10th Five-year Plan, the foreign preferential loans actually utilized throughout China totaled approximately USD 20.7 billion, which supported 150 key projects, including the reinforcing projects of the main dykes of the Changjiang River and the Yellow River, trunk line highways in Sichuan and other provinces, several trunk line railways from Hubei province to Chongqing, the coal-bed gas project in Shanxi province, pollution treatment along the basins of Huaihe River, the projects of the agricultural comprehensive development in the Central and Western Regions, etc. Emphasis was laid on the Central and Western Regions, which gained more than 70% of preferential loans when the foreign preferential loans being arranged. The financing channels and ways of international commercial loans took a feature of diversification. During the10th Five-year Plan, approximately USD 25.8 billion of international commercial loans (except loans granted by foreign-invested enterprises) have been borrowed in China, which mainly supported some urgently-needed projects on energy source and traffic in national economic development as well as partial industrial projects with short construction, good economic returns and ability to generate foreign exchange earnings through export, for example, the hydro-power station of the Three Gorges, Lingao Nuclear Power Station in Guangdong, Tianwan Nuclear Power Station, Qinshan Nuclear Power Station, etc., the purchase of airplanes by airline companies, and so on, helped introduce some important advanced technical equipment and key equipment which could not be manufactured in China, relieved the situation on unsuitable structure of sources of foreign exchange funds of domestic financial institutions, and enhanced the domestic institutions' ability to optimally allocate funds .

(5)

Capacities of managing foreign debts have been further enhanced, and the foreign debt scale is in step with the level of the national economic development and the situation of the international balance of payment. With regard to the tendencies which foreign debts of China took on in recent years, namely, the flow increased by times, the total scale grew rapidly, and short-term foreign debts took up a large proportion, the administrative department of foreign debts successively promulgated related provisions, effectively controlled the growth of foreign debts and adjusted the structure of foreign debts in a timely manner, so as to keep the debt service ratio, liability ratio, and debt-to-GDP ratio of China's foreign debts within the safe lines that are accredited internationally.

(6)

The regulations and policies on foreign capital utilization have been improved constantly, and the management level has been advanced gradually. On the basis of the requirements for the development of socialist market economy and China's promises for entry into WTO, the related laws and regulations on foreign capital utilization as well as the rules and regulatory documents of all departments and localities have been completely cleaned up and amended. We have amended the Catalogue for the Guidance of Foreign Investment Industries twice, have amended the Catalogue of Priority Industries for Foreign Investment in the Central and Western Regions, and have promulgated the Implementation Opinions on the Promotion of the Old Industrial Base in Northeast China to widely Open up to the Outside World . According to the spirit of the investment system reform of the State Council, the auxiliary reform of the management system of the foreign capital utilization was conducted, the approval procedures for foreign loan projects have been regularized, the approval system for foreign-invested projects has been changed into ratification system, the examination steps have been reduced, and the work efficiency has been improved.

However, during the 10th Five-year Plan, there were still some problems on China's foreign capital utilization worth paying attention to: Firstly, the problem of "stressing quantity but ignoring quality", which has existed in absorbing foreign capital for long, is still prominent. Some local governments and departments absorbed foreign capital blindly without caring costs and pursued the quantity of foreign capital unilaterally, and the phenomenon that the state industrial policies were broken occurred frequently. Secondly, the leading enterprises in some industries were acquired and merged with foreign investments more and more frequently, and in a few areas, the symptom of foreign investment monopoly arose or even expanded rapidly, which might threaten the state economic security, particularly industrial security. Thirdly, the overall absorption scale and level of foreign direct investments in the Central and Western Regions were comparatively low, and the gap from the foreign direct investments utilization in the Eastern Regions has been further widened. Fourthly, the technology spillover of foreign-invested enterprises was not prominent, and some foreign-invested enterprise abused intellectual property protection, which did not favor the domestic enterprises' independent innovations. Fifthly, the existing administration system of foreign capital utilization urgently needs to be improved, and a part of presently applicable policies are not favor creating an environment for fair competition between domestic enterprises and foreign-invested enterprises. Sixthly, a small number of projects of foreign loan utilization were not strictly administered, the fund utilization efficiency was low, and the debt repayment was difficult. Seventhly, the proportion of foreign debts with short term increased rapidly, and the potential risks of foreign debt also increased.

2.

Guiding Ideology and Overall Strategic Objective of Foreign Capital Utilization of China during the 11th Five-year Plan Period

During the 11th Five-year Plan, the overall domestic and foreign environments in respect of foreign capital utilization that China faces still tend to be good, and have created conditions for China to improve the quality and level of foreign capital utilization, and to continue keeping the foreign capital utilization in a large scale, as well. The 11th Five-year Plan is, at the same time, also a period when the external environmental restrictions and internal risks of the economic development of China are centralized. For one thing, uncertain factors for the world economic growth still exist has, the global economic development is unbalanced, the international financial market is still likely to suffer from violent turbulence, the trade protectionism tendency is obvious, and the dispute between all countries for international capital becomes increasingly severe. For another, some prominent problems still exist there, for example, China's energy sources and mineral resources are relatively insufficient, the ecological environment is frail, the mode of the economic growth is changed slowly, and the comparative advantages of labor force cost have been weakened.

After making a summary of the domestic and foreign situations, it can be preliminarily concluded that, during the11th Five-year Plan, the foreign capital utilization of China will have the following new changes: in respect of regional structure, with the rising of the cost of production factors in the Eastern Regions, the Central and Western Regions will face very good opportunities in utilizing foreign capital, and the smooth going of echelon transfer of foreign investments will become an important task of the Central and Western Regions in utilizing foreign capital. In respect of industrial structure, the 11th Five-year Plan will be an important period when China's service industry is reformed and developed and the service industry, particularly modern service industry, becomes an industry to which foreign investments will speed up to enter. In respect of investment scale, the cost of foreign investments will be increased, and the speed of increase of foreign investments during the 11th Five-year Plan will be heavily influenced due to the tendency of saturation of investments in domestic traditional manufacturing industries, the rise of the cost of domestic factors, and the restrictions on energies and resources.. In respect of the foreign capital utilization methods, the credit standing of the state and that of enterprises will be improved constantly, the reforms of formation mechanism of Renminbi exchange rate and of other related systems will be propelled constantly, and the foreign exchange reserves with a large scale and the increasing development of domestic investment banking industry have created conditions for China to utilize foreign capital and to reduce financial risks in multiple ways. The layout of domestic traditional industries has been completed basically, and both the building up of new investment projects and the merger and acquisition of enterprises will become important modes of foreign direct investments.

During the 11th Five-year Plan, the guiding ideology of foreign capital utilization of China shall be: To take Deng Xiaoping Theory and the important thoughts of "Three Represents" as the guide, to comprehensively carry out the scientific view of development, and to actively and effectively utilize foreign capital; to make an overall plan for domestic development and the opening up to the outside world, to properly deal with the relationship between the foreign capital utilization and the balance of international payments, that between utilizing foreign capital and making the best use of domestic funds, to promote adjusting and optimizing the structure of domestic industry and regional economy, as well as to conscientiously improve the quality of foreign capital utilization; to propel the construction of an opener independent innovation system, to intensify the integrated innovation ability and the re-innovation ability to import, digest and absorb; to, in the process of further opening to the outside world, actively defend and eliminate various risks, and to conscientiously guarantee the state economic security; to further reinforce, exert and create the comparative advantages of China, to carry out the opening strategy for mutual benefit and common wins, and to actively take part in international economic and technological cooperation and competition within a larger scope, in wider areas and at a higher level.

During the 11th Five-year Plan, the overall strategic objective of foreign capital utilization of China shall be: To further propel the fundamental conversion of foreign capital utilization from "being quantity oriented" to "being quality oriented", to conscientiously transfer the emphasis of the foreign capital utilization from making up the shortage of funds and foreign exchanges to introducing advanced technologies, management experiences and high-quality talents, and to focus more on ecological construction, environmental protection, conservation and comprehensive utilization of resources and energies. By way of introducing foreign advanced technologies and management experiences, we shall exert the functions of leading and eradiating of foreign-funded enterprises to domestic enterprises, promote the improvement of the integrated innovation ability and the re-innovation ability to import, digest and absorb of China; we shall strive for the further extension of foreign investments from the simple processing, assembly, and the production and manufacturing at a low level to research, development, high-end design, modern circulation and other new areas, propel China to become one of the manufacturing bases of high value-added products in the world; we shall greatly improve the level of opening up to the outside world in the service industry; we shall markedly improve the scale, quality and level of foreign capital utilization in the old industrial bases in the Central and Western Regions and those in Northeastern Regions, further intensify the Eastern Regions' economic globalization extent and international competitiveness; we shall utilize foreign preferential loans actively, reasonably and effectively, focus more on their quality and returns; we shall strengthen the control of the structure and purposes of foreign debts, strictly prevent the risks of foreign debt; the total scale of foreign capital shall grow steadily on the basis of the 10th Five-year Plan; up to 2010, the system of foreign capital utilization management shall be more reasonable and effective, and the foreign capital utilization shall be more harmonious with domestic economic and social development.

3.

Major Tasks of Foreign Capital Utilization of China during the 11th Five-year Plan

(1)

Guiding the industrial structural optimization and upgrading of foreign investments

Foreign investors shall be encouraged to invest in and develop modern agriculture, to concentrate on developing ecological agriculture and the planting and breeding industries with high technology content and high added value, to concentrate on comprehensively utilizing agricultural wastes, developing biological mass energy, developing and manufacturing modern agricultural mechanical equipment, and deeply processing of agricultural products, as well as to introduce modernized agricultural technologies and management modes.

We shall encourage foreign investors to continue the investment in electronic information industry, petro-chemical industry, chemical industry, and automobile industry, and so on. They shall, on the basis of requirements for China's industrial upgrading of the heavy chemical industry, appropriately increase foreign investment projects including the large petro-chemical industry and chemical industry, and so on. We shall particularly encourage the projects in which self-balance of resources can be realized, and foreign advanced technologies shall be introduced by ways of joint venture cooperating and other ways. The automobile manufacturing industry shall, when continues doing a good job in upgrading the joint venture enterprises' products and improving the joint venture enterprises' market competitiveness encourage foreign capital to be mostly contributed to automobile design, the building up of research and development centers, and shall continue encouraging foreign capital to be contributed to develop the manufacturing of professional automobile parts and components with high technology content.

We shall encourage foreign capital to continue to be used in reorganization and reform in mechanical industry, light industry, industries concerning textiles, raw materials, construction and building materials, and other traditional industries, as well as be contributed to improve enterprises' technical level and product class, and to enhance enterprises' international competitiveness. We shall reform domestic traditional industries by ways of introducing advanced applicable technologies, equipment and management experiences, bring in foreign investments to develop labor-intensive industries with comparative advantages of China and export processing industry, and to promote the development of the medium and small enterprises featured as "professional, specialized, unique, new and excellent". Foreign capital shall be led to be used in the energy source area so as to accelerate exploring, exploiting, utilizing domestic petroleum and natural gas as well as building up the transporting pipelines, and the development of redeemable energies shall be sped up.

We shall continue encouraging foreign capital to invest in the building up of infrastructures. Foreign investments shall be actively utilized to speed up the construction of the traffic projects such as highways, ports and railways, as well as the urban infrastructures such as track traffic, water supply, gas supply, heat supply, sewage and garbage treatment, and so on, and particularly be encouraged to be invested in urban infrastructure construction in the old industrial bases in the Central and Western Regions and those in Northeastern Regions, and in the development of the succeeding industries in resource-exhausted cities.

(2)

Promoting the construction of a resource-conservative and environment-friendly society

We shall intensify the policy guidance of resource conservation and environmental protection to the foreign capital utilization, and strictly restrict foreign-invested projects at a low level, with high consumption and high pollution; we shall encourage the conservation of water, land and materials in foreign capital utilization, strengthen comprehensive utilization of resources, and encourage the introduction t of advanced applicable process, technology and equipment which may effectively conserve energy and reduce consumption through foreign capital utilization.

We shall actively propel the foreign capital utilization in areas of environmental protection, and propel the carrying out of key projects of environmental protection engineering. We shall intensify comprehensive prevention and control of pollution caused by foreign-invested enterprises such as water pollution, air pollution and solid waste pollution, and so on, and effectively control the pollutant discharge. Foreign investors shall be encouraged to invest in recycling and utilizing waste metal, worn tires, waste electronic products and other industrial wastes as well as utilizing household garbage and sludge as resources. We shall speed up the development of the building up of ecological environments in the Central and Western Regions, and encourage foreign investors to invest in biological mass-energy conversion projects and clean energy projects.

(3)

Propelling the opening up of service industries to the outside world actively and steadily

The opening up of the banking industry to the outside world shall be in line with the principles of progressing in order, supervising prudentially and controlling risks. We shall keep a reasonable structure and layout of both Chinese-invested banks and foreign-invested banks within the territory of China. We shall, on the premise that the Chinese party controls the shares, allow domestic commercial banks to bring in foreign strategic investors. We shall actively support the establishment of strategic partnerships such as stock right cooperation, etc. between foreign-invested banks and Chinese-invested banks, and shall improve the corporate governance structure. We shall encourage both Chinese-invested and foreign-invested banks to cooperate in terms of financial products, work skills, information exchange, resource sharing and trainings, etc., introduce advanced business operation philosophy, operational modes and senior management talents of the modern banking industry, and to promote the conversion of domestic commercial banks' mechanism.

The insurance industry shall carefully fulfill the China's promises on entry into WTO, lay emphasis on bringing in overseas insurance companies and other financial institutions which are specialized in the areas such as pension, medical treatment, liability and agricultural insurance, and so on, and we shall encourage foreign-invested insurance companies to conduct business by setting up business institutions in the Central and Western Regions and in Northeastern Regions. We shall, on the premise that the Chinese party controls the shares, allow State-owned insurance companies to bring in foreign strategic investors, and allow qualified domestic joint stock insurance companies to bring in foreign investments. They shall, through foreign capital utilization, speed up the introduction of foreign advanced insurance products, operational modes and senior management talents, so as to enhance insurance industries' competitiveness of China.

We shall propel the opening up to the outside world of the securities industry in an orderly way and step by step, and shall continue bringing in foreign investors, promote securities business institutions to improve their corporate governance structure, to strengthen their internal risk control and management, and to enhance their management level on the basis of the principle of prudentially supervising; as well as to speed up the industrial integration, product and service innovation. We shall allow listed enterprises to bring in strategic investments from overseas strategic investors after finishing the share-trading reform.

The telecommunication industry shall be steadily and orderly opened to foreign investors. It shall be done strictly according to China's promises for entry into WTO. Foreign investors shall be allowed to run domestic telecommunication business within the statutory scope through joint venture, the proportion of foreign investments in the market of the value-added telecommunication service may be enlarged, and the opening up of the basic service market shall be propelled prudentially. The policy system on the opening up to the outside world of the telecommunication industry shall be improved.

The commercial sector shall lay emphasis on the improvement of the foreign investment absorption level. It shall, by aiming at the introduction of business operation philosophy in modern commerce, foreign advanced distribution methods, marketing network and service means as the objective, keep a proper increase of the number of foreign-invested commercial retail enterprises, and develop foreign-invested commercial wholesale enterprises, large chain stores and distribution centers in an orderly way. Large domestic commercial enterprises shall be supported to optimize the structure by bringing in foreign capital, and to improve the management level, as well. We shall closely focus on the affects of foreign investments to the commercial development of China, conscientiously do well in supervision over anti-trust and fair trading, and keep the Chinese-invested and foreign-invested commercial enterprises' reasonable layout, market shares and structure in large and medium cities.

Large foreign logistics enterprises shall be encouraged to set up logistics enterprises in China in light of related provisions of the laws and regulations of China, and shall be encouraged to utilize foreign funds, equipment and technologies, and to take part in constructing and operating domestic logistics facilities.

We shall actively propel the foreign capital utilization in the tourism industry. We shall utilize foreign capital to improve tourism facilities, to protect and develop tourism resources, to attract overseas tourists, and to improve the management. We shall encourage the wider opening up to the outside world in the industries of transport, construction, legal service, accounting service, consulting, etc. through Chinese-foreign joint venture, Chinese-foreign cooperation, and so on. Foreign investments shall be actively and steadily promoted to contribute to the cultural area, including distribution of audio and video products, operation and brokerage of performance places and cultural products, etc. State cultural security shall be maintained, too.

(4)

Promoting the construction of an opener independent innovation system

Foreign investors shall be encouraged, particularly large transnational companies, to transfer the processing and manufacturing techniques with higher technical level and higher value-added content as well as their research and development institutions to China, and transnational companies shall be encouraged and attracted to set up bases of production and manufacturing, auxiliary, service outsourcing, and training in China and to exert technology spillover effect, so as to promote enhancing Chinese enterprises' capacity of independent innovation.

We shall exert functions of strategic guidance and comprehensive coordination of the government, encourage foreign enterprises, particularly transnational companies, to transfer advanced technologies to China by means of setting up joint venture enterprises, cooperative production, united manufacturing, and so on. Technical exchanges shall be promoted between foreign-invested enterprises and domestic enterprises, the corporation on scientific research and technological development shall be encouraged between foreign companies and domestic hi-tech enterprises, and Chinese-foreign joint venture and cooperation in major hi-tech areas shall be actively propelled.

Foreign investors shall be encouraged and leaded to invest venture capital in China, utilize foreign capital to speed up the development of the venture capital service system of China, and promote the establishment of a group of domestic venture capital enterprises with strong independent innovation capacity, flexible mechanism and high internationalization level. People with overseas education background and overseas Chinese professionals shall be encouraged to come back to China to set up hi-tech enterprises.

(5)

Promoting harmonious regional economic development

The eastern coastal regions shall, as the most important regions on foreign capital utilization, continue exerting the advantages in various terms such as highly export-oriented economy, sufficient funds and talents, advanced technologies, good locations, and strong auxiliary capacity, so as to be the first to realize the conversion of the foreign capital utilization from "being quantity oriented" to "being quality oriented". They shall try to improve independent innovation capacity, speed up realizing the optimization and upgrading of structure as well as the change of growth mode, and enhance their international competitiveness and sustainable development capacity. We shall fully exert the foreign investments' eradiating and driving functions in coastal areas such as the Pearl River Delta, the Changjiang Delta, and the Bohai Sea Rim Region to other regions, and shall, endeavor to develop fund-intensive and technology-intensive industries, hi-tech industries and modern service industries, and improve the technical content of foreign-invested projects, as well on the premise of stressing intensive utilization of land; we shall also strengthen the intra-regional industrial structure optimization, and realize a rational labor division with all the regions exploiting their own particular advantages for mutual benefit. The big cities in coastal regions shall make important progress in opening up to the outside world in the service areas in terms of banking, insurance, commercial, and telecommunication, and so on. .

The active utilization of foreign capital is an important content of propelling the grand western development program, vigorously developing old industrial bases in northeastern regions or elsewhere, and promoting the strategy of Rising in the Central Regions. We shall clarify different regional positioning, and fully exert the driving and eradiating functions of central cities based on the loading capacities of resources and environment, development advantages and development potentiality. We shall seize the opportunities of the transfer of the international manufacturing industry and the transfer of foreign capital from eastern coastal regions, strive to promote the echelon transfer of foreign capital to the old industrial bases in the Central and Western Regions and those in the Northeastern Regions, try to extend the scale of foreign capital utilization of the old industrial bases in the Central and Western Regions and those in Northeastern Regions, speed up the development of the characteristic enterprises with good industrial base, resource advantages and competition advantages in the old industrial bases in the Central and Western Regions and those in the Northeastern Regions, and so on.. Foreign investors shall be encouraged to enlarge investments to the service industries in the old industrial bases in the Central and Western Regions and those in Northeastern Regions, and so on, and a policy inclination shall be given lawfully in terms of market access qualification, access procedures, business scope, and so on.

(6)

Realizing diversification of the methods of foreign capital utilization

The foreign direct investments shall be continuously considered as the key point of the work of foreign capital utilization, and a large scale in utilizing foreign direct investments shall be maintained. Continuously, foreign investors shall be actively attracted to set up new enterprises in China, and the existing foreign-invested enterprises shall be encouraged to re-invest with profits. We shall also exert the driving functions on domestic economy of the new enterprises set up by foreign investors in respect of employment promotion, technical progress, and industrial structural adjustment, and so on.

We shall£¬according to requirements for the state industrial structural adjustment and the enterprise reform, lead foreign investors to take part in domestic enterprise reorganization and reform by means of merger, acquisition, share purchase, re-investment, etc., so as to actively probe into the effective form of revitalizing state-owned assets based on maintaining the state's control and development domination over some key industries and key areas. Except for the key areas and key enterprises concerning state security, we shall gradually loosen the restrictions on the foreign investors who control other enterprises or areas' shares. We shall propel the private enterprises' investment to cooperate with foreign investors, and promote and enhance the private economy's overall level and international competitiveness of China.

Transnational companies shall be continuously encouraged to invest in China to set up various operation centers and production bases such as regional headquarters, centers for research and development, purchase centers, training centers, and so on; they shall be encouraged to intensify their strategic cooperation with the China's local enterprises, be promoted to be more localized and to be better integrated with the economy of China; be encouraged to transfer and proliferate more technologies to local enterprises of China, and be prevented form controlling or monopolizing key industries and areas of China.

We shall strive to strengthen the absorption of foreign capital by utilizing securities investments and investment funds, etc., continue supporting the listing of domestic enterprises outside the territory of China. We shall improve the mechanism for enterprise operation under international rules, and shall extend the scale of foreign capital utilization through share rationing or capital increasing, etc. according to requirements for enterprise development. We shall support large domestic enterprises that meet the requirement to grasp good opportunities in the international capital market to issue securities in Hong Kong and other overseas stock markets and bonds markets for raising funds. We shall continue strengthening and regulating the administration of domestic enterprises in terms of issuing stocks or listing outside the territory of China, and using funds, etc., so as to set up the Chinese enterprises' good image in international capital market.

We shall optimize the structure of origin of foreign capital, actively extend the scale of investments in China which are from developed economies with advanced technologies and management experiences, such as Europe Union, North America, Japan, and try to improve the proportion of investments in China which are form such developed economies.

We shall lay emphasis on absorbing capital from Taiwan, and continue applying the policies of "giving priorities under equal conditions, and properly loosening" to Taiwan investors that invest in the Mainland. We shall actively propel the implementation of the Closer Economic Partnership Arrangement of Mainland/Hong Kong and Mainland/Macao, encourage investors from Hong Kong and Macao to add their investments in the Mainland, and further intensify and deepen the economic connections of Mainland/Hong Kong and Mainland/Macao. Overseas Chinese investors shall be encouraged to invest in the Mainland.

(7)

Improving the quality and returns of foreign loan utilization

Foreign preferential loans shall be borrowed actively, reasonably and highly-efficiently. We shall keep foreign preferential loans in a certain scale, and at the same time, care the social returns and economic returns of foreign loan utilization; we shall attach importance to the absorption of advanced international technologies, management experiences and knowledge philosophy, exert the functions of the loan projects in demonstrating and driving, and improve the quality and returns of the loans.

The contribution of foreign preferential loans shall be optimized to selected areas. More prominence shall be given to resource conservation, environmental protection, ecological construction, new countryside construction, harmonious development of urban and rural areas and harmonious regional development, and we shall lay emphasis on supporting traffic infrastructure construction, urban infrastructure construction, environmental protection, resource protection and ecological construction. We shall, appropriately offer more support in the social development areas such as education, public health construction, rural and urban drinking water safety, and community services, etc. on the premise of reducing the cost of loans. The Central and Western Regions shall be given an inclination to, and the investment environment shall be improved. The loans used in the Central and Western Regions and in the Northeastern Regions shall account for 80% of the total foreign preferential loans or more.

There shall be innovations and breakthrough in the methods of foreign preferential loan utilization. We shall further probe into the effective channels of combining foreign preferential loans with related domestic funds, and research the approach of combining the utilization of central budgetary funds and treasury bond funds with the utilization of foreign preferential loans on the premise of sticking to stressing project loans.

The scale of international commercial loans shall be extended properly. We shall fully take into account the situation of the domestic supply of Renminbi and foreign exchange funds, the exchange rate alteration tendency and the comprehensive cost and risks of financing in international capital market, and shall offer support to domestic enterprises and financial institutions meeting requirements to finance and speed up development through raising funds in international capital market, issuing foreign currency bonds within the territory, and financial lease, etc. International commercial loans shall, according to the requirement of domestic industrial policies and structural adjustment and optimization, be mainly used to support the development of the industries such as finance, civil aviation, petro-chemistry, chemical industry, electronic information, advanced manufacturing industry, etc; in respect of purposes, the loans shall be used to introduce advanced technologies and equipment. We shall probe into utilizing foreign funds to improve the building up of the system of domestic credit, enhance the guaranty companies' guaranty capacity, and improve the private enterprises' financing environment. As for the international development institutions such as International Finance Corporation and Asian Development Bank issuing Renminbi bonds within the territory of China, we shall, based on the experiments made during the period of the 10th Five-year Plan, summarize experiences and develop steadily.

(8)

Intensifying the macro-monitoring and full- aperture administration of foreign debts

We shall, with regard to the adjustment of foreign debt administration aperture, the emergence of Renminbi foreign debts and the gradual establishment of classified management bylaws for policy banks and commercial banks and the modern enterprise system, research to work out related policies, effectively control the total scale of the state's foreign debts, and control the main indices of China's foreign debts such as the debt service ratio, foreign debt ratio, etc. to be within the internationally accredited safe line. We shall maintain the reasonable term structure and currency structure of foreign debts, and reasonably control the short-term foreign debt scale. We shall improve the monitoring and pre-warning system of foreign debt, earnestly intensify the overall administration of foreign debts, intensify the analysis of exchange rate risks and other foreign debt risks, and enhance the capacity of preventing foreign debt risks.

4.

China's Policy Measures on Foreign Capital Utilization during the 11th Five-year Plan

(1)

Constructing a fairer and sounder environment for foreign investments.

We shall, according to the requirement for the development of the socialist market economy of China and the opening up to the outside world, research to work out laws and policies on promoting foreign investments, amend and promulgate a uniform Enterprise Income Tax Law applicable to both domestic and foreign enterprises, amend and improve the legal systems on strengthening foreign exchange administration, and further improve the legal system concerning foreign interests, which satisfies the need in socialist market economy.

We shall reduce administrative examination and approval matters of the government, regulate and simplify procedures for handling matters conscientiously and lawfully, and create a fair and foreseeable policy environment for enterprise development. We shall actively propel the building up of EDI-based customs clearance, and endeavor to improve the clearance efficiency. We shall intensify the legislation and law enforcement on intellectual property protection, severely combat tortious acts, and earnestly guarantee Chinese and foreign intellectual property owners' lawful rights and interests. We shall strengthen the building up of the system of basic social credit, improve the bylaws on punishment of discredit, and construct an honest and credible society.

We shall speed up the construction of a full-aperture foreign investment statistical system including foreign investments (containing foreign direct investments and other investments of foreign investors) and foreign loans, completely monitor and accurately reflect the trends of foreign investments, promulgate the statistical data on foreign investments to the public in a timely and entire manner, and provide a better base for decision-making. We shall continue focusing more on the compacts of the reform of Renminbi exchange rate system to the foreign capital utilization, and provide corresponding measures in a timely manner. We shall further improve the management of capital and financial projects, and steadily propel the convertibility progress of Renminbi capital accounts. We shall closely focus on the trends of international capital flows and the policy changes on foreign capital utilization from key countries, promulgate responding policies in a timely manner, and maintain the attraction of China to high-quality and high-level foreign investments.

(2)

Intensifying the policy guidance to foreign investment industries and to the contribution thereof to selected regions

We shall, according to the development and changes of the economic situation, dynamically adjust the Catalogue for the Guidance of Foreign Investment Industries, further widen the opening up to the outside world, propel the optimization and upgrading of the industrial structure, conserve resources, protect environment, and prevent the blind investments and excessive production capacities in some industries. Related provisions concerning the regulation of the development of processing trade shall be worked out, the mechanism for processing trade investment shall be improved, and the transformation and upgrading of the processing trade shall be promoted. The Catalogue of Imported Commodities for Foreign-invested Projects Not Exempted from Tax shall be amended, and the gap of the tax exemption treatment between domestic and foreign-invested enterprises on equipment import shall be further reduced, so as to apply uniform taxation policies on equipment import finally.

We shall strictly abide by China's promises for entry into WTO, work out and promulgate related provisions concerning the promotion of the foreign capital utilization in the service industry, and enlarge the areas for foreign capital utilization in the service industry. We shall research to gradually loosen the policies on restrictions on foreign investments in the service area in terms of territory, stock rights and business scope, etc., actively and steadily propel the opening to both domestic and foreign investments of monopolizing industries and areas in a uniform and orderly way. We shall work out the administrative measures for further regulating the development of overseas institutions and investment of real estates within the territory of China, and prevent short-term international capital from greatly influencing the economy and finance of China via the real estate industry.

The Catalogue of Priority Industries for Foreign Investment in the Central and Western Regions shall be amended, and the contribution of foreign investments in the Central and Western Regions shall be effectively led. Related policies and detailed implementation rules shall be worked out on speeding up the opening up of the old industrial bases in the Northeastern Regions, etc., and the opening up of the Central and Western Regions, as well.

We shall further regulate the purchase of domestic stocks and bonds of foreign institutional investors who satisfy the condition, regulate the strategic investments of overseas institutions to the listed companies in China, improve related administrative measures, and shall, when speeding up the opening up to both China and the outside world of the capital market, lead an orderly and controllable flow of securities investments funds.

(3)

Intensifying the implementation of resource conservation and environmental protection

The access standards for foreign-invested projects shall be worked out in terms of energy consumption, water consumption, land occupation, etc, and bylaws on compulsory elimination of energy-consumptive and water-consumptive outdated process, technologies and equipment shall apply to various enterprises including foreign-invested enterprises. Various types of environmental protection supervision shall be strengthened over enterprises including foreign-invested ones, the law enforcement efforts shall be intensified, and the bylaws on clean production examination, environmental marks and environmental certification shall apply. We shall research to work out comprehensive encouragement policies on offering support to foreign-invested environmental protection industries, speed up the progress of market-based pollution treatment. We shall research to work out regular access policies on foreign-invested exploration and exploitation of mineral resources, reinforce the access conditions for foreign-invested exploration and exploitation of mineral resources. We shall work out and improve related policies concerning the encouragement of foreign investors to invest in water conservation projects, energy conservation ones, material conservation ones, to strengthen comprehensive resource utilization, and to transfer advanced technologies.

(4)

Guiding various forms of technical cooperation and united innovations of domestic and foreign-invested

We shall work out and promulgate comprehensive encouragement policies on leading foreign investors, particularly, large transnational companies, to transfer their high-end processing and manufacturing techniques as well as research and development institutions to China, so as to encourage transnational companies to set up bases of production, manufacturing, auxiliary, service and training in China. We shall also work out auxiliary policies on encouraging foreign-invested enterprises to carry out research and development cooperation with domestic enterprises, so as to better exert the foreign-invested enterprises' technology spillover effect.

We shall improve policies on tax exemption of equipment imported for foreign-invested projects, and encourage foreign-invested projects to purchase more domestic advanced equipment and technologies, so as to create a better market environment for the complete sets of domestic equipment and advanced applicable technologies, and to promote the development of the equipment manufacturing industry of China. We shall, when strengthening intellectual property protection, make full use of international experiences for reference, work out rules and policies concerning the prevention of transnational companies from abusing intellectual properties to restrict the independent innovations of China, and shall enhance our capacities of actively taking part in working out intellectual property rules.

We shall improve the administrative provisions on encouraging and regulating foreign investors to conduct venture investment in China, speed up the promulgation of related auxiliary policies, use international successful experiences in venture investment for reference, and improve the mechanism for foreign investors' contribution and withdrawal of venture capital. We shall set up and improve policies and bylaws on encouraging people with overseas education background and overseas Chinese professionals to come back to China to set up hi-tech enterprises, and work out related auxiliary policies in respect of taxation, entry, exit, and work permit, etc. on attracting overseas high-level talents to invest and work in China.

(5)

Further strengthening the foreign loan borrowing administration

We shall continue improving the administration of foreign preferential loans, the regulation of the procedures for examination, approval and use of loans, the development of the loan re-lending mechanisms, and the improvement of the work efficiency and fund use efficiency. We shall, in accordance with the guideline of harmonious social and economic development, broaden new loan areas and exploit new loan methods so as to meet the needs in the continuous economic and social development. We shall strengthen coordinating and cooperating with multi-lateral and bi-lateral foreign loan-granting institution, and advocate active interaction based on the constant absorption of their experiences and technologies.

We shall practice the promotion of specific measures for foreign preferential loan utilization in the Central and Western Regions as well as in the Northeastern Regions, offer support in respect of loan proportion, auxiliary funds and auxiliary policies, and give inclination in terms of lending plans. The active functions of foreign loans in regional economic cooperation shall be fully exerted, and the economic growth and social construction in border areas shall be propelled so as to create conditions for strengthening the economic cooperation with the surrounding countries and regions.

The related provisions for international development institutions to issue bonds as well as to make stock right and credit investments within the territory of China with the funds financed by issuing bonds shall be amended and improved, the administrative measures for Chinese enterprise to issue foreign currency bonds within the territory of China shall be worked out and improved, as well as the opening and development of domestic bond markets shall be regulated and supported. The administrative measures for regulating foreign-investment-involved disposal of non-performing assets shall be further improved, the efficiency of non-performing asset disposal shall be improved, and the healthy and orderly development of non-performing asset disposal market of China shall be promoted.

(6)

Improving the level of the monitoring, control and management of foreign debt risks

We shall further improve the pre-warning system of foreign debt risks, enrich and improve the indices of the foreign debt monitor. We shall effectively control reasonable foreign debt structure and the use orientation, intensify the administration and monitoring of the foreign debts of foreign-invested enterprises, the foreign debts of the overseas institutions set up by Chinese enterprises, and China's contingent foreign debts , and shall intensify the efforts of the control on the short-term foreign debts, so as to combine the administration of the foreign debt with that of the foreign exchange organically, and to guarantee the safety of the balance of international payments.

We shall strengthen the macro-guidance on foreign debt risk management of domestic enterprises, regulate the use of various forms of derivative financial instruments, strengthen the administration of the contingent foreign debts arising out of derivative products, and promote the domestic market of derivative financial products to develop healthily.

We shall further reform the management mode of the foreign debt, and conduct classified administration to different financing entities. We shall propel the national treatments on the administration of foreign debt of both domestic and foreign-invested enterprises, and effectively monitor and control overseas enterprises' foreign debt risks. We shall research to provide new modes of total amount control and overall administration of international commercial loans.

(7)

Maintaining state economic security and public interests

We shall speed up the promulgation of the Anti-trust Law, strengthen the efforts in anti-trust work, and maintain a market order of fair competition. We shall further detail the policies for sensitive industries concerning national economy, people's livelihood or state security, and improve the foreign-invested industry access system; we shall strengthen examining and supervising the foreign-invested merger and acquisition of key enterprises in the sensitive industries concerning state security, and guarantee the controlling force over the strategic industries and key enterprises concerning state security, national economy or people's livelihood, and ensure the domination over the development thereof. We shall lay emphasis on the wholly-owned foreign enterprises' effect on the economic security of China, particularly industrial security, and set up a reasonable evaluation and pre-warning system. We shall strengthen taxation regulation, and prevent foreign-invested enterprises from transferring profits through transfer pricing or associated transactions, and so on.

We shall set up a reasonable mechanism for the evaluation of enterprise asset which meets the requirements for international practices, and prevent the damage of domestic assets and interests in the process of foreign-invested merger or acquisition; we shall, in the process of capital increase to a joint venture enterprise, maintain the reasonable interests of the Chinese party under law, and guarantee the lawful rights and interests of the merged or acquired enterprise's employees ; we shall firmly stop investment canvassing acts which damage China's interests such as low-price land assignment, and shall continue intensifying the administrative enforcement supervision system over foreign-invested enterprises.

We shall take effective measures to strictly regulate the policies on foreign capital utilization of all localities and all departments, and keep the consistency with the state laws and regulations and solemnity of local and departmental regulations or policies. Each locality shall absorb foreign capital by mainly depending on its own advantages and good environment for investment, and shall not unlawfully reduce or exempt taxes or promulgate other preferences against the state policies or regulations. We shall continue reforming and improving the methods of canvassing investments, fully exert the enterprises' functions as market roles, and more frequently adopt the new investment canvassing methods such as public bidding invitation, canvassing investments on network, and so on, so as to avoid the blindness and excessive administrative intervention in investment canvass, and to improve the actual effects of investment canvass.

(8)

Actively taking part in formulating and coordinating the international economic rules

We shall earnestly face the new round of WTO negotiations, propel the bilateral and regional cooperation of economic and trade actively and steadily, speed up the development of the multi-lateral and bilateral investment cooperation relations, and establish a mechanism for promoting the investment cooperation with key countries, so as to create an external environment which may be beneficial to China in the absorption of foreign investments.