Developments on China’s negative list, FI access

By Liu Hongchuan, Broad & Bright
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In recent years, China has been overhauling its decade-long foreign investment regulatory framework to be more in line with international practices, and to continue attracting foreign investment. One significant development is to change the previous “approval system” of foreign investment into a “registration system”. The other is to gradually implement the “national treatment plus negative list” approach for access of foreign investment to China.

Liu Hongchuan
Senior partner
Broad & Bright

Along this line, the Chinese government recently issued two important regulations relating to the foreign investment negative list: the Foreign Investment Industrial Guidance Catalogue (2017 amendment) and the Special Administrative Measures (Negative List) for Admission of Foreign Investments to Pilot Free Trade Zones (2017 version), which reflects the most recent development of China on foreign investment and the negative list.

In China, there have always been restrictions and barriers on entry to Chinese market by foreign investment. However, over time such restrictions have become formalized and more transparent.

China began to experiment with the true concept of negative list regulation in its newly-established free trade zone. When Shanghai became the first free trade zone (FTZ) of China in 2013, the Shanghai government quickly issued a negative investment list, which set out only those access measures applicable to foreign investments that are inconsistent with national treatment. For the fields not covered by the negative list, the approval system for foreign investments in the Shanghai FTZ must be replaced by the registration system. This is the first negative investment list in a real sense for China.

Nationwide foreign investment negative list: 2017 Foreign Investment Industrial Guidance Catalogue. Compared with the 2015 catalogue, the most significant change of the 2017 catalogue (applicable to all of China except the FTZs) is that it formally adopts the form of a negative list. A new section called Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign investments) contains the restricted industries and prohibited industries, as well as incorporating all of the requirements of shareholding and senior executive in other industries. It also deletes the wording “other industries restricted/prohibited by the laws and regulations of the state or international treaties”. Second, the 2017 catalogue clearly states, for the first time, that restrictive measures applicable to both domestic and foreign investments are not included in the negative list, which is a significant step towards the implementation of national treatment to all foreign investments.

Third, the 2017 catalogue also removes many requirements on shareholding and senior executive, particularly in certain service, manufacturing and mining industries. For instance, the 2017 catalogue deletes the requirement of Chinese nationality of the managing partner of accounting and audit service, the requirement of at least a 50% Chinese shareholding of manufacturers of motorcycles, and the shareholding requirements of exploration and development of coalbed gas.

2017 changes to FTZ negative list. From 2013 to 2017, the FTZ negative investment list has undergone significant change. The industries under the special administrative measures have been cut from 190 in 2013 to 122 in 2015. For the 2017 FTZ negative list, it further decreases by 27 industries compared with the 2015 version, including mining, manufacturing, transportation, services, culture, sports and entertainment industries. Similar to the 2017 catalogue, the 2017 FTZ negative list removes restrictions applicable to both domestic and foreign investment.

Foreign investment negative list and the future. The reform on foreign investment regulation initiated by the Ministry of Commerce in 2016 requires that all foreign investments are subject to a “registration” rather than “approval” of the relevant governmental authority. However, the new regulation left an important exception: those industries that fall into the special administration measures for foreign investment access (which in fact corresponds to the negative list) are still subject to approval of the governmental authority.

As China had yet to have a clear negative list in 2016, there was substantial uncertainty as to the exact scope of industries that are subject to approval requirements. With the enactment of the 2017 catalogue and the publishing of the negative list, it is believed that “foreign investment enterprise registration reform” can be undertaken more smoothly.

The promulgations of the two regulations are two significant steps on China’s long march to a national treatment plus negative list approach for foreign investments. The new development of the foreign investment negative list should give some confidence to the world that China will continuously improve its foreign investment regulatory system and further carry out the principle of national treatment for foreign investors in the future.

Liu Hongchuan is a senior partner at Broad & Bright. Jiang Yan and Hemmat Ovaisi also contributed to this article

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