The last decade has seen a progressive relaxation of the regulatory regime governing foreign investments into China. In particular, the enactment of the Foreign Investment Law (FIL) (外商投资法) and its Implementing Regulations (外商投资法实施条例) heralded a new era of foreign investments into China. The FIL and its Implementing Regulations came into effect on January 1, 2020.
The FIL replaced the foreign investment approval system administered by the Ministry of Commerce (MOFCOM) under the old regime. Under the FIL, greenfield investments, mergers and acquisitions, and other types of investments set forth by the FIL by foreign investors may enjoy the same regulatory treatment as that applicable to domestic investors (national treatment), unless they fall within the scope of industries listed in the Special Administrative Measures for the Market Entry of Foreign Investment (Negative List). Foreign investments into the pilot free trade zones in China are subject to a separate negative list.
The Negative List contains two types of industries: (i) industries where foreign investments are entirely prohibited (e.g. exploration of rare earth, online publication services, social surveys, postal services, film production and distribution) and (ii) industries where foreign investments are restricted (e.g. construction and operation of civil airports or nuclear power plants, telecommunications services, medical institutions). Restrictions typically take a form of prohibition of acquisition of a controlling stake, but in certain cases, there are qualification requirements on senior management members. It is noteworthy that the 2020 version of the Negative List (effective as from July 23, 2020) does not contain any financial services sector. Accordingly, foreign investments into financial institutions are, in theory, no longer subject to any foreign ownership restrictions, although the relevant regulatory approvals/filings remain required and practical uncertainties still exist.
As for foreign investments in industries not listed in the Negative List, regulatory restrictions have now been lifted and the regulatory procedures applicable to them are much simpler than before. Under the new legal regime, where applicable, foreign investment projects will require: (i) approval from the central and local offices of an industry-specific regulator (e.g. China Banking and Insurance Regulatory Commission); (ii) approval from, or filing with, the central and local offices of the National Development and Reform Commission; or (iii) registration with the central and local offices of State Administration for Market Regulation.
It remains unclear whether or not the variable interest entity (VIE) structure, i.e. a structure that allows an investor to hold a controlling interest by way of contractual arrangements, falls within the regulatory ambit of the FIL at all. There is a risk that the VIE structure may be interpreted by Chinese regulators of certain sensitive industries as falling within the scope of the FIL and will therefore be scrutinized based on the ultimate ownership behind the VIE structure. In light of this, foreign investors should continue to act with caution before embarking on a VIE structure involving any industry falling within the Negative List.
The changes introduced by the Negative List demonstrate China’s continuous efforts to open up its markets to foreign investments and its attempt to leverage foreign investments to upgrade its own industrial capabilities. Such efforts have not been dampened by the COVID-19 pandemic.