China: China's 2019 Negative Lists – A Positive, If Small, Step

For international investors looking at opportunities in China, this summer has been largely a waiting game. Investors have been waiting and hoping as the Chinese government and the Trump administration continue their discussions aimed at resolving the current trade dispute, and watching for guidance on specifics of implementation of China’s new Foreign Investment Law, which was promulgated on March 15, 2019 and will come into effect on January 1, 2020.

As we continue to wait, one of few concrete developments in China’s regulation of foreign investment was the issuance of an updated set of Negative Lists -- namely, the Special Administrative Measures on Access to Foreign Investment (2019 edition) (the “National List”) and the Free Trade Zone Special Administrative Measures on Access to Foreign Investment (2019 edition) (the “FTZ List”) -- and an accompanying new Catalogue of Encouraged Industries for Foreign Investment (the “Catalogue”). All of these documents were jointly issued June 30, 2019 by the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) and came into effect on July 30, 2019.

HOW THE LISTS WORK

The two Negative Lists stipulate the industry sectors in which foreign investment is either prohibited or restricted. Foreign investment in restricted sectors is subject to foreign investment regulatory approval. Industry sectors that are not listed are open for foreign investment, and do not require foreign investment regulatory approval. The FTZ List and the National List respectively cover foreign investments in China’s various free trade zones (“FTZs”) and in the rest of China. Frequently, industry sectors are first opened for foreign investment within the FTZ as a trial, before they are opened nationwide.

Foreign investors need to be aware that particular sectors not listed in a Negative List may nonetheless be subject to restrictions due either to other industrial policies or the requirement to obtain a particular industry license that may be difficult to obtain. Homework is therefore required.

The Catalogue specifies industry sectors where foreign investment is encouraged and eligible for tax and other investment incentives and includes two sub-catalogues, one applicable nationally and the other in the 22 provinces designated as China’s “central and western region”.

WHY THE NEW EDITIONS MATTER

The new editions of the National List, the FTZ List and the Catalogue do not represent a dramatic change in Chinese foreign investment policy and more far-reaching changes likely await progress in the China-U.S. trade talks. At the same time, the National List and the FTZ List are materially shorter, with fewer industry sectors still prohibited from or restricted for foreign investors. The National List now includes 40 items, down from 48. The FTZ List includes 37 items, down from 45. Conversely the Catalogue has grown, adding 67 new sectors where foreign investment is eligible for incentives.

Key changes in the National List and the FTZ List include as follows:

  • The service sector has been a particular focus. For example, the 51% equity cap on foreign investment in domestic shipping business has been removed. Restrictions on foreign control of municipal gas and water supply and of cinemas and performance agencies have been removed as well.
  • Of particular note, a number of foreign ownership restrictions in the telecommunications sector have been dropped, including in regard to e-commerce, domestic multi-party communication services, storage and forward services, and call centre services. This is a welcome development for many international tech companies, although it is not unexpected, with foreign investment restrictions in these areas previously having been lifted in the FTZs.  Foreign investment restrictions in other key areas, including internet data centres, continue.
  • The mining sector has been further opened, with the exploration and mining of molybdenum, tin, antimony and fluorite no longer prohibited for foreign investment.
  • As a result of the revisions to the FTZ List, foreign investment in fisheries is no longer prohibited within the FTZs and foreign investment in the printing of publications in the FTZs is no longer restricted to a minority foreign stake.

A major focus of revisions to the Catalogue is to enhance support for the high-tech manufacturing sector. In the IT sector, foreign investment in, for example, 5G components, equipment for cloud computing and IC etching equipment are all newly listed. Service sectors newly covered include engineering and accounting services, e-commerce, AI and clean manufacturing.

LOOKING AHEAD

The new round of investment liberalizations implemented via the new Negative Lists and Catalogue is welcome news for international companies in a number of sectors. Equally, the range and extent of liberalizations cannot be described as dramatic or far-reaching and are not likely to significantly impact the level of new foreign investment coming to China.

More dramatic changes to the foreign investment environment in China may be coming. Further revisions to the Negative Lists and Catalogue might come as part of a China-U.S. trade deal. The Chinese government recently announced a significant expansion of the Shanghai FTZ through establishment of a new Lingang area. Information about the specific investment policies to be implemented in Lingang remain scant but some commentators expect that Lingang will be used to trial innovative tax and other policies. The government has also announced wide-ranging pilot reforms in Shenzhen, which seem likely to significantly change the policy environment for foreign investors there. Critically, the Foreign Investment Law takes effect from January 1 next year and, whichever direction the trade and investment winds blow, various implementing regulations are expected shortly in order to animate the principles set forth in that law. These various changes in the ecosystem for foreign investment in China will almost certainly eclipse the modest revisions to the Negative Lists.

* This article was featured in the Hong Kong Lawyer’s online magazine on 23 August 2019

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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