(AFP) – Nov 7, 2007

SHANGHAI (AFP) — 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 Thursday.

In a wide-ranging directive published late Wednesday, China's key economic developmental agency identified sectors from real estate and financials to oil and rare metals as restricted or off limits to foreign capital.

Overseas investment that can help China to protect the environment, cut pollution and develop renewable energy will be encouraged, according to the National Development and Reform Commission statement.

"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 official China Daily newspaper said in an editorial.

Investment in high technology and advanced materials and equipment manufacturing will also be welcome, but those in production industries in which China has mature technologies and capacity will not be encouraged, it said.

The directive highlights Beijing's latest policy initiative to restructure its export-driven economy whose booming but lopsided growth has for decades relied on government and foreign investment to expand.

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

Refining of copper, zinc, aluminium and rare earths will be restricted and so will the exploration for gold, silver and platinum.

Limits will also be placed on high end real estate such as hotels and malls, property agent companies and brokerages, as part of efforts to cool soaring real estate prices nationwide.

In the financial industry, the commission confirmed restrictions already in place in life insurance and asset management.

China's spectacular economic growth of the last three decades has come at a heavy price to its environment, while surging exports have created a huge trade surplus that is at the forefront of trade spats with major economic 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 (foreign investment) come in," he said. "China doesn't now want just rapid growth without paying attention to quality."

Some analysts also expressed concern for what they said looked like a turn towards protectionism.

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

"The government is worried about resources and the rise in commodity prices, and wants to make sure that scarce resources are under the control of domestic firms, but that's the direction that we're worried about."

Recent policy measures have added to the impression that China is becoming more discerning about investment.

The government has rolled out rules that require state-level approval for mergers and acquisitions. China's State Council, or cabinet, has also released a list of strategic sectors in which the state intends to retain control.

Among them are military-related manufacturing, power production and grids, petroleum, gas and petrochemicals, telecoms, coal, civil aviation and shipping.

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