China Continues to Lift Restrictions on Private Investment

by Zhang Yi and Ge Jiaying*

On May 7, 2010, the State Council issued the Opinions on Encouraging and Guiding the Healthy Development of Private Investments ("Opinions"), proposing to open more industries sectors to private investors and encourage private capital to make investments into areas and industries where the existing PRC law does not expressly prohibit private investment. As some of the industries are currently monopolized by state-owned enterprises ("SOEs"), the Opinions undoubtedly provide good news for private equity funds and other private investors in China.

I. Private Capital Faces Substantial Investment Restriction

Although China's private investment has seen substantially growth with the rapid economic development of China, private investors still face an uphill battle.

First, there is no complete market access for private investors. The existing investment laws and regulations are silent on certain limited industries and areas in which private capital should be restricted. However, in practice, to achieve macroeconomic control, relevant government authorities tend to be very prudent and apply a more stringent standard than those applied to state-owned investors when evaluating and approving private investment projects. Therefore, this drastically decreases the chance that a private investment project will get approved. Statistics show that state-owned capital is permitted to enter 72 of the 80 industries in China, foreign capital is allowed in 62, and private capital has access to only 41.(1)

Second, the existing monopoly makes it difficult for private investors to compete with SOEs. In some basic industries, SOEs monopolized for many years and continuously enjoyed preferential treatments, and thus the likelihood that private capital may enter in these industries is very slim unless the private investors are protected by special policies.

Third, as relevant investment laws and regulations lack authorities regarding private investment, private investors are vulnerable to the changes of investment policies. For example in Shanxi province, a group of private investors from Zhejiang province invested in small and medium-sized coal mines(2)were substantially affected by the confusion of policies. As the existing PRC law is ambiguous about the ownership of mineral rights, private investments have to rely heavily on the implementation of local policies. However, once the local governments change their policies, such changes are likely to have a significant impact on private investments.

Investment restrictions have forced excessive private capital into the securities market and the real estate market, where private investors hope to profit from securities or property speculation. Unfortunately, these speculative transactions resulted in economic bubbles and social problems.

II. The Encouraged Industries

According to the Opinions, the State will encourage private investments in projects in various industries and areas, including the basic industries, infrastructures, public utilities, policy-related housing projects, public service, financial service, trade-related business management and logistics, national defense science and technology.

  • A. Basic Industries

    Private capital is encouraged in the transportation industry. A private investor may fund the construction of highways, ports, and civil airports as a sole owner, controller, or shareholder of the project company. The Opinions also encourage the investment of private capital in the building of railway by equity participation. According to the Opinions, the State will also try to broaden the scope of private capital investment in railway industry.(3)

    Private investors are encouraged to invest in power industry as well. Investable items include the construction of hydropower, thermal, and nuclear power plants as a sole owner, controller, or shareholder of the project company.(4) Private investors are also welcomed to invest in the oil and gas industry, especially joint exploration of oil and gas with the SOEs. (5)Like railway industry, private investors are encouraged to invest in fundamental telecommunication operation by equity participation.(6)

    It is worth noting that before the promulgation of the Opinions, these industries were monopolized by SOEs, market entry was almost non-existent for private capital.

    B. The Real Estate Industry

    The Opinions encourage private investors to participate in the bidding of land rehabilitation, land reclamation, and other similar projects.(7)

    The Opinions also invite private capital to invest in the construction of policy-based housing projects. The State will support and provide guidance to the participation of the private capital in affordable housing and public rental housing projects. Private investments in these projects are entitled to the preferential policies for policy-based housing projects.(8)

    C. Financial Service Industry

    In the financial service industry, private investors are encouraged to increase the registered capital of commercial banks and participate in the restructuring of the rural and urban credit cooperatives. Private investors can also take part in establishing village banks, financing companies, rural credit union funds, credit guarantee companies, and financial service providers. (9)

    In addition, the State will continue to lift the restrictions on the percentage of shareholding by private investors in the financial institutions, simplify the bad debts review, and writing off procedures applicable to small and medium-sized financial institutions. Moreover, the State will offer financial subsidies to companies providing agriculture-related small business loans which resemble those provided to rural banks. (10)

III. Other Supportive Measures

With improving the investment environment in its mind, the Opinions adopt a series of measures to encourage and direct private investments into more areas and industries. These measures include:

  • A. Abolishing and amending regulations and policies that impede the growth of private investment;(11)

    B. Providing additional financing support to private investment by establishing a sound financing guarantee system, improving venture capital investment mechanism and environment, promoting the development of equity investment funds, and encouraging private companies to obtain financing from the stock and bond markets;(12)

    C. Consolidating matters subject to administrative approval and streamlining relevant procedures.(13)

IV. Comments

In 2005, the State Council introduced the Opinions of the State Council on Encouraging, Supporting and Guiding the Development of Proprietary, Private and Other Types of Non-Public Economy, also known as the "36 policies for non-public economy". Compared to the 36 policies for non-public economy, which provided general principles for private economy, the Opinions are geared towards investment-related issues. With more detailed rules, the Opinions may provide better guidance and directions to private investors.

However, similar to the 36 policies for non-public economy, the Opinions are just general policies. Despite offering investment opportunities and incentives to private capital investment, the implementation of these policies and incentives are contingent on more definitive rules and regulations. Otherwise, private investments will once again back to square one.

(This article was originally written in Chinese, the English version is a translation.)

* Ge Jiaying is a paralegal of King & Wood's Securities Group in Shanghai.


(1) See "Private investment takes up to 20% of the total investment to monopolized industries andonly 0.6% in the railway industry",, May 28, 2009,accessible at (last visited on May 24, 2010).

(2) In 2009, Shanxi province issued a number of documents, including the Opinions of Shanxi Provincial Government on Accelerating the Implementation of Merger and Restructuring of Coal Mines and the Circular of Shanxi Provincial Government on Issues Relating to Acceleration of Merger and Restructuring of Coal Mines. These documents aim to consolidate the small and medium-sized coal mines in Shanxi. The legal nature of mineral rights is unique and the existing PRC law is unclear regarding how these rights should be priced when the owner transfers them.When Zhejiang investors had to sell their mineral rights to state-owned companies upon the issuance of the said new policies at below market price, these investors suffered severe losses from the change of policy climate.

(3) See Article 5 of the Opinions.

(4) See Article 7 of the Opinions.

(5) See Article 8 of the Opinions.

(6) See Article 9 of the Opinions.

(7) See Article 10 of the Opinions.

(8) See Article 13 of the Opinions.

(9) See Article 18 of the Opinions.

(10) See Article 18 of the Opinions.

(11) See Article 29 of the Opinions.

(12) See Article 31 of the Opinions.

(13) See Article 32 of the Opinions.