Regulatory Reform in China – New Negative Lists for Foreign Investment Promulgated and Regulatory Procedures Consolidated

Following President Xi's announcement in his speech at Boao Forum in April 2018 that China would complete the amendments to the negative lists for foreign investment in the first half of the year, the National Development and Reform Commission and the Ministry of Commerce (MOFCOM) jointly promulgated the 2018 version of the Special Management Measures for the Market Entry of Foreign Investment (Negative List) (外商投资准入特别管理措施(负面清单) (2018年版)) (New National Negative List) and the 2018 version of the Special Management Measures for the Market Entry of Foreign Investment in Pilot Free Trade Zones (Negative List) (自由贸易试验区外商投资准入特别管理措施 (负面清单)(2018年版)) (New FTZ Negative List) on 28 June and 30 June 2018, respectively. The new negative lists have further reduced the scope of industrial sectors in which foreign investment is subject to restrictive or prohibitive measures. The New National Negative List will take effect from 28 July 2018 and the New FTZ Negative List will take effect from 30 July 2018.

Simplifying the regulatory procedures for foreign investment into China has been a focus of the Chinese government amid a series of regulatory reforms in recent years. Effective from 30 June 2018, the previous two steps i.e. filing with MOFCOM (MOFCOM Filing) and registration with the SAMR (which refers to the State Administration for Market Regulation) (the AMR Registration) or their respective local counterparts in respect of foreign investment related matters have been consolidated into one single submission procedure.

Unlike the 2017 version, the New National Negative List is no longer divided into two separate lists setting out industries restricted or prohibited from foreign investment respectively, but captures all special measures (including any restriction or prohibition of foreign investment and specific requirements on the foreign ownership or senior management) applicable to foreign investment in a consolidated table form.

Compared with the 2017 version, the New National Negative List pares down the special measures for foreign investment from 63 items to 48 items. The further opened up industrial sectors include financial services, transportation and logistics, commercial and trading, professional services, manufacturing, infrastructural, energy and resources and agriculture.

We set out below a few examples: 

• Financial services sector: The restrictions on foreign shareholding in domestic banks are eliminated, and the cap of foreign shareholding in securities companies, fund management companies, futures companies and life insurance companies is raised to 51 per cent.
• Agricultural sector: The restriction on foreign shareholding in the production of seeds of agricultural crops (except the seeds of wheat and corns) is eliminated.

• Infrastructural facilities sector: The restriction on foreign shareholding in the construction and operation of truck railway lines and the railway passenger transport companies is eliminated.

• Transportation and logistics sector: The restriction on foreign shareholding in the design, building and repair of vessels, the international marine transportation and the international ship agency is eliminated.

• Commercial and trading sector: The restriction on foreign investment in the construction and operation of gas stations and the wholesale and retail of rice, wheat and corns is eliminated.

• Cultural sector: The prohibition on foreign investment in internet cafes is eliminated.

The New National Negative List also sets out a roadmap and timetable for yet further opening-up of the financial services and automobile sectors in the next few years. According to these provisions, all foreign shareholding restrictions in the financial services sector will be lifted in 2021. Foreign shareholding restriction on the manufacturing of commercial vehicles and passenger vehicles will be lifted in 2020 and 2022 respectively. The current restriction that a foreign investor may establish no more than two joint ventures that manufacture the same category of whole vehicle products will also be removed in 2022.

Since September 2013, China has established 11 pilot free trade zones which serve as the experimental fields for China’s reform and opening-up policies. The negative list for foreign investment was a concept first introduced for the pilot free trade zones and later on rolled out across the country.

The New FTZ Negative List is slightly shorter than the New National Negative List. In addition to the relaxation of foreign investment restrictions in the New National Negative List as outlined above, the New FTZ Negative List further relaxes the foreign investment restrictions in the following sectors: 

• Agricultural sector: The permitted foreign shareholding in the selection and breeding of new varieties of wheat and corn is increased from 49 per cent to 66 per cent.

• Mining sector: The joint venture requirement on the exploration and development of oil and natural gas is eliminated, and the prohibition on foreign investment in the exploration, exploitation and ore dressing of radioactive minerals is also eliminated.

• Cultural sector: The foreign shareholding restriction on performance brokerage agencies is eliminated, and the establishment of performing arts groups is now permitted for foreign investment but the majority stake should be held by Chinese shareholders.

• Telecommunication sector: The pilot policies in respect of value-added telecommunications (e.g., allowing foreign investment in call centre services, domestic multi-party communications services, Internet access services and domestic Internet virtual private network services subject to certain foreign shareholding limitation) currently adopted in the original area of the China (Shanghai) Pilot Free Trade Zone will be introduced to all the other free trade zones across the country.

It is expected that the differences between the national negative list and the free trade zone negative list will be further reduced in the next version, with the aim of adopting a uniform negative list applicable to the whole country in the next few years.

To implement the general requirement of the State Council regarding the simplification of regulatory procedures for enterprise investment, the AMR Registration and MOFCOM Filing procedures with respect to the establishment of foreign-invested enterprises have been consolidated.

Starting from 30 June 2018, SAMR or its local counterpart will serve as a one-stop shop window for AMR Registration and MOFCOM Filing in respect of foreign investment related matters, which means that going forward foreign investors will only need to submit one set of application documents to SAMR or its local counterpart, instead of undertaking two separate regulatory procedures. This new administrative measure will enhance the efficiency of AMR Registration and MOFCOM Filing and is another meaningful step in the Chinese government’s endeavour to simplify the regulatory regime of foreign investment.

For any further questions, please contact Sun Hong or Tony Zhong of Norton Rose Fulbright, Shanghai.