The EO interviewed Zhang Yansheng, principal of International Economics Institute under Macroeconomics Academy of the NDRC, on November 8th. Zhang says that the new guidelines are in step with the government's "scientific outlook on development", which advocates innovation, energy conservation, and reduction of the trade surplus. Zhang was brought into the drafting process as an expert advisor.

The Economic Observer: The new Catalogue was supposed to be promulgated in the first half of the year. Why was it postponed until now?

Zhang: With economic and social conditions in China changing so rapidly, people in different areas and different industries hold widely divergent opinions on foreign investment policies, making it hard to reach a consensus. Some say that the Chinese economy has been rather well developed, and therefore it's time to adopt consistent industrial policies on domestic and foreign investment based on fairness and non-discrimination. But actually all of the adjustments, whether to those highly energy-consuming, seriously polluting and resources-related businesses or to those technologically undemanding, low-value-added processing businesses, have brought public responses far exceeding our expectation. Things are much more complicated than we have imagined. With this in mind, it's not bad news that the policy makers acted cautiously and postponed promulgating the Catalogue a little.

The EO: There are quite a few disagreements on China's policy regarding foreign investment. Can you break this down a little?

Zhang: In my own opinion, the most difficult question is whether to encourage or limit those low-tech foreign processing enterprises.

At the very beginning of China's reform and opening-up, which was the toughest time for attracting foreign investment, a batch of Hong Kong businessmen came to China and invested in the simplest and the least technology-demanding industries, such as box, bag, shoe, hat, clothing etc. factories. Before that, exports were concentrated in natural resources such as crude oil, timber, and coal. It's those Hong Kong businessmen who taught us how to organize a system of market production, which was of special significance to China.

As mature foreign capital entered various industries in China, questions began to pop into many people's mind. Now that China's trade surplus is hovering at a high level, are those pioneer foreign firms of low technology and low value added still needed? Should those polluting, high energy-consuming, resource-related enterprises be kept away from the domestic market in the future? Many say that it's improper to limit these foreign firms today after all the contribution they have made to market activity in the darkest days of the Chinese economy.

The EO: According to the new Catalogue, traditional processing businesses are neither encouraged nor limited or forbidden. What does this indicate?

Zhang: As far as I know, Taiwan, Hong Kong, and Macao enterprises are now preparing for anything by demonstrating their values in various ways to the government, and meanwhile, adjusting themselves according to the policies. I think the government should, above all, stick to its attitude of limiting or forbidding processing businesses, and at the same time provide certain support to them—they deserve it for their past service.

The government has long been working hard to gather processing enterprises in special areas such as bonded logistics zones, export-oriented processing zones and bonded ports.

The newly revised Catalogue shows the latest policies, their significance, and policy direction. Foreign firms today have more social responsibilities-- to conserve energy, control pollution, and produce higher technology products.

The EO: We heard of the government's concern about the joint financing of domestic and foreign capital during the revising process. And in the new Catalogue, many industries are labeled as "limited to joint ventures and partnerships". Is this what they call joint financing of domestic and foreign capital? Will it be able to temper the surge of foreign individual proprietorship enterprises?

Zhang: We have followed a "V" route in treating joint ventures and partnerships. In the early days, foreign firms were obligated to cooperate with domestic ones and share their technologies. After China joined the WTO, some of the barriers were removed as it had promised. Therefore foreign firms had a freer business environment and gradually turned to individual proprietorships. Gaining their independence, those firms began protecting their own interests by adopting harsher measures of "counter-imitation" and "counter-technology-divulging", and applying intellectual property rights rules and WTO regulation. Despite the land and favorable policies we offered, we didn't realize the technology transfers we had hoped for. That's why the government resorted to the joint venture mode this time.

Many technologically undeveloped industries are added to the limited-to-joint-ventures category in the new Catalogue, such as mining, additives for natural food etc.

From this angle, we can see the document is encouraging joint ventures by market regulation based on fairness. We have gone through an opening-up process after joining WTO that left China standing at an even higher status in the trade arena. This is the direction of China's development. Joint ventures in the past were like forced marriages in ancient China, but now things are different. Companies make their own decisions on who should be their partners, just like women have the right to choose the right men.

The EO: Why are foreign investment forbidden or limited in projects of golf fields, villas and top-grade hotels? Foreign investment in real estate grew at a 60 percent rate in the first nine months of the year. How will the Catalogue affect the real estate market?

Zhang: China is confronted with triple pressure from the yuan's appreciation, land administration, and environmental resources. Limitation to foreign investment doesn't give domestic investors the access to these projects.
Foreign capital plays a significant role in China's real estate market. The key influence comes from its performance. Most foreign capital is legal, but there remain speculation. Apart from the foreign capital itself, the government's attitude also counts. Local governments are basically positive about foreign investment, as it helps with GDP growth as well as financial revenues and employment.

The new document also forbids and limits mining because mines are rare and precious. It's necessary to adopt strict regulations on foreign investment in this industry since related systems are not fully developed yet.

The EO: This is the first revision of the Catalogue since 2004. What's your comment on its rate of progress?

Zhang: Reform in China is progressing step by step. The same is true of the Catalogue. We have to lay aside some of the problems which can not be solved today. The Catalogue is a clear reflection of the scientific outlook on development in terms of its devotion to independent innovation, energy reservation, surplus control, and shepherding businesses in the processing industries.