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09. November 2007

Beijing puts new limits on foreign investment

Shanghai - China has released new rules to prohibit or limit foreign investment in key industries as it seeks to cool its overheated economy and clean up its damaged environment.

State press reported yesterday that Beijing had identified sectors ranging from property and financials to oil and rare metals that would be restricted or barred to foreign capital.

In a wide-ranging directive published late on Wednesday, the National Development and Reform Commission said overseas investment that could help China to protect the environment, cut pollution and develop renewable energy would be encouraged, China Daily reported.

"It should give a shot in the arm to efforts to save energy and protect the environment by encouraging greener use of foreign investment," the newspaper said in an editorial.

Investments in high technology and advanced manufacturing would also be welcome, but those in sectors where China had mature capacity would not be encouraged.

The directive is part of Beijing's efforts to restructure its export-driven economy, which has relied on state and foreign investment to drive its booming but lopsided growth.

Under the guidelines, foreigners are barred from investing in non-renewable mineral resources, such as tungsten, tin, antimony, molybdenum, and smaller oil refineries.

Refining of copper, zinc, aluminium and rare earths will be restricted, as will exploring for gold, silver and platinum.

To cool soaring property prices, limits will be placed on high-end sites like hotels and malls, as well as estate agencies. In the financial sector, the agency confirmed restrictions already in place in life insurance and asset management.

China's environment has paid a heavy price for the spectacular economic growth of the past three decades. Surging exports have built a huge trade surplus that has fuelled spats with major trading partners.

Chen Xingdong, an economist at BNP Paribas in Beijing, said the rules reflected a fundamental change in China's strategies for foreign funds.

"In the past there was no control - China just opened the door, the window and let whatever [investment] come in," Chen said. "China doesn't now want just rapid growth without paying attention to quality."

Some analysts were concerned at what they said looked like a turn towards protectionism.

Shen Minggao, an economist at Citigroup in Beijing, said: "The overall direction should be [towards] more open industries rather than the opposite.

"The government … wants to make sure scarce resources are under the control of domestic firms, but that's the direction that we're worried about."

Recent policy measures have bolstered the view that China is becoming more discerning about investment.

The cabinet has listed strategic sectors in which the state intends to retain control, including military manufacturing, energy, telecoms, civil aviation and shipping.

The government has ruled that mergers and acquisitions require state-level approval.

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