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Foreign investment restrictions to be further relaxed: A brief analysis on the Negative Lists 2018

On 28 June 2018, China’s authorities issued the Special Administrative Measures (Negative List) for Foreign Investment Access (Edition 2018) (National Negative List). Such list will take effect from 28 July 2018, and will apply to mainland China except for China’s free trade zones (FTZs) [1].

On 30 June 2018, China’s authorities further issued the Special Administrative Measures (Negative List) for Foreign Investment Access to Free Trade Zones (Edition 2018) (FTZs Negative List). This list will take effect from 30 July 2018, and will be applicable to FTZs within mainland China[2].

Both the National Negative List and the FTZs Negative List (New Negative Lists) set out the restricted and prohibited business sectors for foreign investment. Foreign shareholding ratio restrictions and/or senior management restrictions are also set out in the New Negative Lists. Timetables for the further opening of certain restricted industry sectors are also included in the New Negative Lists. Sectors not included in the New Negative Lists will be regulated under the principle of identical treatment for both domestic and foreign investment, i.e. no special restrictions should be imposed on foreign investment in those sectors.

Compared to the 2017 edition Negative Lists, the New Negative Lists significantly relax investment restrictions. Relevant changes are outlined as follows:

I. National Negative List

i. Service industry

No. Sector                                                 Changes
1 Finance Cancels foreign shareholding ratio restrictions in the banking industry. Raises the foreign shareholding ratio limit to 51% in security companies, security investment fund management companies, futures companies, and life insurance companies. In 2021, all restrictions in the financial industry, including the foregoing shareholding ratio limit, will be cancelled.
2 Infrastructure construction Cancels restrictions on the building and operation of railway arterial networks and power girds.
3 Transportation Cancels restrictions on investment in passenger railway transportation companies, international maritime transportation companies, and international shipping agency companies.
4 Commercial and trade distribution Cancels restrictions on the building and operation of petrol stations. Cancels restrictions on grain purchasing (note: here “purchasing” means to purchase from farmers or other producers) and grain wholesaling.
5 Culture and entertainment Repeals the prohibition on investment in Internet cafes.
6 Professional services Cancels restrictions on investment in surveying and mapping companies.

 

ii. Manufacturing

No. Sector                                                       Changes
1 Automobile Cancels the foreign shareholding ratio limit in the complete vehicle manufacturing of both special vehicles and new energy vehicles. In 2020, cancels the foreign shareholding ratio limit in commercial vehicle manufacturing. In 2022, cancels the foreign shareholding ratio limit in passenger-car manufacturing, and repeals the rule providing that a foreign company shall not establish more than two joint ventures for manufacturing the same type vehicles in China.
2 Ship and boat Cancels restrictions on designing, manufacturing and repairing ships and boats.
3 Aircraft Cancels restrictions on designing or building or repairing mainline and regional aircraft, general purpose aircraft, helicopters, ground effect and sea skimmer aircraft, drones and stratospheric airships.
4 Others Repeals the prohibition on investment in the manufacturing of weapons and ammunition.

iii. Agriculture

No. Sector                                                       Changes
1 Seed industry Cancels restrictions on the cultivation of new crop varieties and the production of crop seeds, except for wheat and corn.

iv. Mining industry

No. Sector                                                      Changes
1 Mining and auxiliary mining activities for non-ferrous metal ore and non-metal ore Cancels restrictions on exploration and mining of precious and rare coal.
Cancels restrictions on exploration and mining of graphite, smelting and separation of rare earth, and smelting of tungsten.

Please note that in business sectors related to culture, publicity and so forth, foreign investment restrictions have been clarified and tightened by the National Negative List.  The main changes include:

No. Sector                                                  Changes
1 Education Adds a prohibition on investment in religious education institution.
2 Film production, distribution, and screening Adds a prohibition on investment in film import business.
3 Relic conservation Adds a prohibition on investment in state owned cultural relic museums.
4 Culture and entertainment Adds a prohibition on investment in arts performance organizations.
5 Legal services Adds a prohibition on becoming a partner of a domestic law firm.

II. FTZs Negative List

The FTZs Negative List and the National Negative List are roughly identical in their content, except that restrictions in some sectors under the FTZs Negative List have been further relaxed. A comparison is set out as follows:

i. Service industry

No. Sector National Negative List FTZs Negative List
1 Telecommunications

For a telecommunications company, the telecommunication services are confined to those promised at China’s WTO accession, and foreign-investment in value-added telecommunications services must not exceed 50% (excluding e-commerce); basic telecommunications services must be controlled by the Chinese side[3].

Further to the policies under the National Negative List, the pilot policies previously applicable only to Shanghai FTZ is extended to all FTZs[4].
2 Culture and entertainment

An entertainment artist agency must be controlled by the Chinese side.

Cancels restrictions on foreign investment in entertainment artist agencies.

Foreign investors are prohibited from investing in arts performance organizations.

Relaxes the requirement that “arts performance organisations must be controlled by the Chinese side”.


ii. 
Manufacturing

No. Sector National Negative List FTZs Negative List
1 Nuclear fuel and nuclear radiation processing

Foreign investors are prohibited from investing in the smelting and processing of radioactive minerals, and the production of nuclear fuel.

Repeals the prohibition on investment in smelting and processing of radioactive minerals, and the production of nuclear fuel.


iii. Agriculture

No. Sector National Negative List FTZs Negative List
1 Seed industry

For wheat and corn, the cultivation of new varieties and production of seeds must be controlled by the Chinese side.

Relaxes the restriction that “the shareholding ratio of the Chinese side shall be no less than 34%” when it comes to the cultivation of wheat and corn new varieties or production of wheat and corn seeds.


iv. Mining industry

No. Sector National Negative List National Negative List
1 Oil and natural gas mining

The exploration and development of oil and natural gas (excluding coalbed methane, oil shale, oil sands, shale gas, etc.) should be limited to Sino-foreign equity joint venture and Sino-foreign cooperative joint venture.

Cancels restrictions on foreign investment in the exploration and development of oil and natural gas (excluding coalbed methane, oil shale, oil sands, shale gas, etc.).

Please note there are further specifications and explanations attached to some items in the FTZs Negative List, so as to clarify access requirements or distinguish applicable measures. For example, for film production, distribution and screening, the New Negative Lists provide that “Foreign investors are prohibited from investing in film production companies, distribution companies, cinema companies, and film import businesses”. Further, the FTZs Negative List provides further that “however, upon approval, foreign enterprises are allowed to cooperate with Chinese enterprises to jointly shoot films”. From our understanding, such specifications or explanations can be used as reference when it comes to interpreting specific provisions under the National Negative List.

III. Assessment of the New Negative Lists

The New Negative Lists are welcome developments and implementation of many of the market opening-up initiatives announced by China recently. It should be noted however that other regulatory restrictions may remain applicable to investing in specific industry sectors notwithstanding the relaxations under the New Negative Lists[5]. Further, the industry sector openings reflected in the New Negative Lists will not cancel contractual commitments that foreign investors have already entered into. For example, many automobile manufacturers may already be locked up in exclusive joint venture arrangements that may make taking a 51%ownership, setting up a wholly foreign owned enterprise or establishing multiple joint ventures more difficult. The New Negative Lists, however, reflect China’s ongoing commitment to the opening-up of its economy to foreign investment, and its promises of equal treatment for foreign and domestic investors.

____________

[1] The Special Administrative Measures (Negative List) for Foreign Investment Access (Edition 2018) will take effect from 28 July 2018. On that same day, a previous negative list under the Catalogue for the Guidance of Foreign Investment Industries (Revised in 2017) shall be repealed. However, under the same catalogue, a sub-catalogue concerning encouraged foreign investment industries will continue to be effective. If there are any preferential opening-up measures for qualified investors under other agreements, international treaties, or regulations for special economic zones, then relevant agreements or regulations shall prevail.

[2] The Special Administrative Measures (Negative List) for Foreign Investment Access to Free Trade Zones (Edition 2018) will take effect from 30 July 2018. On that same day, the Special Administrative Measures (Negative List) for Foreign Investment Access to FTZs (Edition 2017) shall be repealed. If there are any preferential opening-up measures for qualified investors in other agreements or international treaties, then relevant agreements shall prevail.

[3] According to the Provisions on Guiding the Orientation of Foreign Investment (Order of the State Council of the People’s Republic of China (No.346)), “controlled by the Chinese side” refers to the total investment proportion of the Chinese parties in a foreign-funded project shall be 51% or more.

[4] According to the Opinions of the Ministry of Industry and Information Technology and the People’s Government of Shanghai Municipality on Further Opening Up Value-added Telecommunications Business in China (Shanghai) Pilot Free Trade Zone (2014), the pilot policies include:

a. The foreign shareholding ratio of information service business and store-and-forward business, which have been opened up to foreign investment under China’s WTO commitments but with an equity limit of no more than 50%, may exceed the 50% equity limit on a pilot trial basis. The aforesaid information service only refers to app stores.

b. Four new business areas are opened up on a pilot trial basis, i.e. call centres, domestic multi-party communication services, Internet access services (access service for Internet users), and domestic Internet virtual private network (VPN). In particular, the foreign shareholding ratio of call centres, domestic multi-party communications and Internet access (access service for Internet users) may exceed 50%; while that of domestic Internet VPNs must not exceed 50%.

c. The foreign shareholding ratio of online data and trade processing (for-profit e-commerce) businesses must not exceed 55%.

d. To apply for conducting the aforesaid telecom businesses, an enterprise shall be registered with and have its service facilities located in the pilot zone. The business scope of Internet access (access service for Internet users) shall be limited within the pilot zone, while that of other businesses may cover the whole country.

[5] As mentioned in another article recently published by Deacons, which concerns the Notice on Several Measures concerning the Active and Effective Use of Foreign Investment to Boost High-quality Economic Growth (Notice), it is worth noting that “the Notice stresses that for business sectors not covered by the Negative Lists, no local governments or governmental departments shall specifically impose restrictions on foreign investment access. In past practice, some local governments did impose restrictions on foreign investment access outside the Negative Lists, due to, for example, a failure to repeal obsolete regulations or policies. The Notice emphasizes prohibitions against such practice. Another point to note is that the State Council and some local governments have also released national or local catalogues concerning investment guidance, restrictions or prohibitions for specific sectors. Such catalogues are formulated for all domestic and foreign investors, and should not be regarded as “special restrictions on foreign investment access”, i.e. foreign investors should continue to be bound by these catalogues in accordance with the law”.

Key Contacts

Edwarde Webre

Partner | Corporate Commercial

Email or call +852 2825 9730

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