To do business in China, companies must adhere strictly to the law, avoid prohibited activities and seek approval for restricted activities. We explain how to apply the three Negative Lists that define the prohibitions and restrictions.
China is a dynamic market undergoing constant change and reform as it continues to open up more business activities to foreign companies. There is regular talk about the "negative list" when doing business in China, which should be the first port of call when looking to commence new business activities in the country as it defines both which activities are prohibited, and which activities require specific prior government approval. In reality, there are three negative lists and it is vital for all businesses in China to be aware of the lists that apply to their business.
With rules and regulations under constant review, it is always advisable for companies to work with local experts to ensure that they do not fall foul of the law at this very first step.
The Negative List on Market Access
The latest version, issued 25 December 2018, marks the full implementation of the market access negative list system in China, which is now applicable to all companies, both domestic and foreign owned. Any company can operate business activities that do not appear on the negative list (although foreign owned companies are also subject to the additional negative lists detailed below). The list is in three sections. The first is an explanation of the scope of the list, followed by the list of activities that are prohibited for non-governmental bodies, and finally those that require prior government approval for a company to be permitted to undertake the activity. The two appendices reference the specific regulations that apply to the prohibitions and restrictions, where full details can be found.
This system reinforces the decisive role of the market in allocating resources and, by granting equal rights and opportunities to all market players under one set of rules, will reinvigorate investment in business. It also advances government reforms related to the examination and approval system, investment mechanism, supervisory mechanism, social credit system, and the reward and punishment mechanism.
The list includes 151 industry items with 581 administrative measures, with 147 industry sectors listed that require prior government approval - the qualification criteria and required technical standards are provided.
Investors are prohibited from carrying out activities in violation of The Catalogue for Guiding Industry Restructuring, issued by the National Development Regulatory Commission, and non-financial companies may not conduct financial related business or have a business scope or a company name that includes any sensitive wording relating to finance, banking, insurance or other similar sectors. Investors are also prohibited from carrying out activities in violation of The Catalogue on Prohibition on Internet Market Access, such as public sale of prescribed medicines via the internet or courier and there are restrictions on activities of internet loan brokerage firms.
The list is a consolidation of current guidance, rules and regulations previously spread across many different government bodies. It applies to both foreign and domestic investors and provides a general guide as to which rules and regulations they should refer to. It supports the principle of market openness; any industries not listed on the Negative List are open to all market players with equal access, except that for foreign investors there may be additional restrictions under the other government lists discussed below.
The Special Administrative Measures for Access of Foreign Investment (Negative List) (2018 Edition)
This list specifically applies to all companies in China that are controlled by overseas investors. This is the seventh edition since first introduction in 1997. The list must be adhered to by all foreign investors before establishment of their businesses in China. Like the Negative List on Market Access it too has a list of prohibited activities and a section detailing business activities that will require specific approval from the government authorities before a foreign investor can undertake the activity.
Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2018 Edition)
This is the fifth edition of this negative list that first originated in 2013, reflecting the pace of change to regulations in China. It applies to all foreign invested businesses that operate within one of the designated Free Trade Zones (FTZ) within China. It has the same structure as the other two lists with a set of prohibited activities and a section defining activities that can be undertaken given prior government approval.
Compared with the Negative List for Access of Foreign Investment, the 2018 version of the FTZ negative list further opens up the markets to investors and cancels limitations in some industry sectors. It cancels limitations on petroleum and gas exploration, expands the trial policy on the telecoms industry to all FTZs nationwide and cancels Chinese party majority ownership requirements for agencies for the performing arts. Establishment of an Artistic-culture Performance Group is now permitted as an Equity Joint Venture provided it is with Chinese party majority ownership.
Priority on application of Negative Lists for a foreign investor
It is advisable for foreign companies to check the FDI Negative List first, except where they intend to operate within a FTZ, when the broader and less rigorous FTZ Negative List should take precedence. It is generally only sensible to open within a FTZ if the business activities are focused on traditional FTZ functions, such as transit trade or logistics, or if the main industry has been set lower qualification criteria in a FTZ area.
The Negative List on Market Access must then be referenced to ensure that the business activities are not more generally prohibited or restricted.
With three lists to reference, each of which undergoes regular change, and a sea of underlying rules and regulations to wade through, it is always advisable to work closely in China with a firm of local experts who can help you to navigate safely and efficiently to your business destination.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.