China introduces new Negative List 2020 and new FTZ Negative List 2020
As to market access by foreign investors, starting from 28 July 2017, the People’s Republic of China (“PRC”) implemented a nationwide negative list approach. The negative list approach means that foreign investment in the PRC is, generally, permitted, unless the respective project or entity falls within a so-called negative list. Foreign investment in areas falling under a negative list is still subject to restrictions or prohibitions. Further, under the negative list approach, the previous ex-ante approval requirements for foreign investment in the PRC have generally been shifted to (ex-post) record-filing and, since 1 January 2020, mere reporting procedures, unless the respective project or entity falls within a negative list. Foreign investment in industry sectors which are listed in a negative list, are still subject to approval by the competent Authority of Commerce. Article 4 of the PRC Foreign Investment Law, effective since 1 January 2020, now formally states that the PRC shall implement a system of pre-establishment national treatment, which, however, is subject toto the above described negative list approach.
Generally, there are 2 different sets of negative lists. I.e. one for the 18 Pilot Free Trade Zones (“FTZs”) and one for the rest of the country. The currently still effective Special Administrative Measures (Negative List) for Foreign Investment Access, 2019 Version (“Negative List 2019”) and the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones, 2019 Version (“FTZ Negative List 2019”) had been issued on 30 June 2019 by the PRC National Development and Reform Commission (“NDRC”) and the PRC Ministry of Commerce (“MOFCOM”) and took effect on 30 July 2019.
In connection with the PRC Foreign Investment Law which entered into effect on 1 January 2020, it was already planned to further update the current Negative List 2019 and the current FTZ Negative List 2019. During an executive meeting of the State Council on 10 March 2020, the PRC’s Prime Minister LI Keqiang said that the negative lists of 2020 shall be issued earlier than in the past few years to “show our determination and confidence to further open up to the international community” as well as to “reduce the negative impact of the COVID-19 epidemic on foreign investment”.
Thus, on 23 June 2020, the NDRC and the MOFCOM jointly issued the new Special Administrative Measures (Negative List) for Foreign Investment Access, 2020 Version (“Negative List 2020”) and the new Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones, 2020 Version (“FTZ Negative List 2020”). Both the Negative List 2020 and the FTZ Negative List 2020 will enter into effect on 23 July 2020. Simultaneously with the entering into effect of the Negative List 2020 and the FTZ Negative List 2020, the current Negative List 2019 and the current FTZ Negative List 2019 will cease to be effective.
Below is an overview on the key changes brought by the Negative List 2020 and the FTZ Negative List 2020.
1. Changes in the Restricted or Prohibited Items of the Negative List 2020 and the FTZ Negative List 2020
In comparison to the current Negative List 2019 and the current FTZ Negative List 2019, the new Negative List 2020 and the new FTZ Negative List 2020 further reduce restrictions and prohibitions on foreign investment and, thus, provide for further access for foreign investors in certain key industries, such as finance, infrastructure, manufacturing, agriculture, biomedicine and education. Details are set out below.
Compared to the Negative List 2019, the new Negative List 2020 has reduced restrictions and prohibitions, which are now divided into 12 categories, from 40 to 33. Compared to the FTZ Negative List 2019, the new FTZ Negative List 2020, has reduced restrictions and prohibitions, which are now divided into 12 categories, from 37 to 30. I.e. the Negative List 2020 has reduced restrictions and prohibitions by 17.5%, and the FTZ Negative List 2012 has reduced restrictions and prohibitions by 18.9%.
The 12 categories of both the Negative List 2020 and the FTZ Negative List 2020 are (1) Agriculture, Forestry, Animal Husbandry and Fishery; (2) Mining; (3) Manufacturing; (4) Production and Supply of Electric Power, Heating Power, Gas and Water; (5) Wholesale and Retail Industry; (6) Transportation, Storage and Mail; (7) Information Transmission, Software and Information Technology Services; (8) Leasing and Business Services; (9) Scientific Research and Technical Services; (10) Education; (11) Health and Social Work; and (12) Culture, Sports and Entertainment.
Key changes are as follows:
a) Further expanding the opening-up of key service industries
(1) Finance
According to the Negative List 2019 and the FTZ Negative List 2019, the shareholding ratio of foreign investors in a securities company, a securities investment fund management company, a futures company and a life insurance company is not allowed to exceed 51%.
However, on 11 October 2019 and 13 March 2020, the China Banking and Insurance Regulatory Commission has announced on its website that from 1 April 2020, the above-mentioned limitations on the shareholding ratio of foreign investors shall be cancelled. This has now been reflected in the Negative List 2020 and the FTZ Negative List 2020. All current restrictions on the shareholding ratio of foreign investors in the above-mentioned companies have been completely removed from the Negative List 2020 and the FTZ Negative List 2020. This means that according to Negative List 2020 and the FTZ Negative List 2020 now all restrictions on the shareholding ratio of foreign investors in the finance sector have been removed.
(2) Infrastructure
According to the Negative List 2019 and the FTZ Negative List 2019, investments in the construction and operation of water supply and sewage pipe networks in a city with more than 500,000 residents must be controlled by the Chinese party.
Such restriction has now been removed from the Negative List 2020 and the FTZ Negative List 2020.
(3) Transportation
According to the Negative List 2019 and the FTZ Negative List 2019, foreign investment in air traffic control is prohibited.
The Negative List 2020 and the FTZ Negative List 2020 have softened such restriction and now foreign investors are only not allowed to participate in the construction and operation of airport towers.
(4) Surveying and Mapping
Under the Negative List 2019 and the FTZ Negative List 2019, foreign investors are prohibited from investing in geodetic surveying, hydrographic surveying and charting, surveying and mapping via aerial photography, ground mobile surveying, surveying and mapping of administrative area borders, compiling of topographical maps, world administrative maps, national administrative maps, administrative maps at the provincial level or below, nationwide used maps for schools, locally used maps for schools and true three-dimensional maps, compiling of navigation electronic maps and regional investigations in terms of geological mapping, mineral geology, geophysics, geochemistry, hydrogeology, environmental geology, geological disasters and remote sensing geology.
The Negative List 2020 and the FTZ Negative List 2020 have kept the above prohibitions, but added that mining right owners working within the scope of their mining rights are not subject to such special administrative measures.
b. Further releasing restrictions to the access to manufacturing and agriculture industries
(1) Manufacturing
The Negative List 2019 and the FTZ Negative List 2019 still provided that, except for special purpose vehicles and new-energy vehicles, the shares of a manufacturer producing other types of vehicles held by Chinese parties shall be at least 50 percent, and that a single foreign investor may establish only up to two joint ventures in the PRC to manufacture the same type of vehicles (limits on the foreign shareholding will be removed for commercial vehicles in 2020; in 2022, the limits on the foreign shareholding will be abolished for passenger vehicles, and the restriction that a single foreign investor may only establish up to two joint ventures in the PRC to manufacture the same type of vehicles will be eliminated as well).
The Negative List 2020 and the FTZ Negative List 2020 now provide that, except for special purpose vehicles, new-energy vehicles and commercial vehicles, shares of a manufacturer producing other types of vehicles, held by Chinese parties, shall be at least 50 percent, and a single foreign investor may establish up to two joint ventures in China to manufacture the same type of vehicles (in 2022, the limits on the foreign shareholding will be abolished for passenger vehicles, and the restriction that a single foreign investor may establish up to two joint ventures in China to manufacture the same type of vehicles will be eliminated as well). I.e., the restriction on the shareholding ratio of foreign investors for manufacturing commercial vehicles has been removed. It is, therefore, no longer required that Chinese shareholders hold at least 50% of the shares in commercial vehicles manufacturing companies. Now, the shares in commercial vehicle manufacturing companies can be solely held by foreign investors.
Further, according to the Negative List 2020, foreign investors are no longer prohibited from investing in the smelting and processing of radioactive minerals and the production of nuclear fuels. In Free Trade Zones (“FTZs”), this was already allowed before.
(2) Agriculture
The Negative List 2019 stipulates that the selection and cultivation of new varieties of wheat and corn and the production of seeds of wheat and corn, must be undertaken by a company controlled by the Chinese party.
The Negative List 2020 now provides that the Chinese parties shall hold at least 34% of the shares of a company undertaking the selection and cultivation of new varieties of wheat and the production of the seeds of wheat. The selection and cultivation of new varieties of corn and the production of seeds of corn, however, must still be undertaken by a company controlled by the Chinese party.
In FTZs, already before, the Chinese parties shall hold at least 34% of the shares of a company undertaking the selection and cultivation of new varieties of both wheat and corn and the production of the seeds of both wheat and corn.
c. Further opening up in FTZs
The FTZ Negative List 2020 is only applicable for foreign investments in the, currently, 18 FTZs in the PRC, which are located in Shanghai, Guangdong, Tianjin, Fujian, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, Shaanxi, Hainan, Shandong, Jiangsu, Guangxi, Hebei, Yunnan and Heilongjiang. Below are key changes which only apply in FTZs.
(1) Biomedicine
According to the Negative List 2019 and the FTZ Negative List 2019, foreign investors are forbidden from investing in the application of processing techniques of traditional Chinese medicine decoction pieces, such as steaming, frying, cauterizing and calcining and the manufacturing of Chinese patent medicine products with a secret formula.
Such prohibition has now been removed from the FTZ Negative List 2020. I.e., foreign investors are allowed to invest in traditional Chinese medicine decoction pieces in FTZs after the effectiveness of the FTZ Negative List 2020.
(2) Education
According to the FTZ Negative List 2020, foreign investors are now allowed in FTZs to establish occupational training institutions beyond and within the educational system.
2. General Changes in Accordance with the PRC Foreign Investment Law
a. Changes in wording
The wording of both the Negative List 2020 and the FTZ Negative List 2020 has been adjusted in accordance with the PRC Foreign Investment Law and its implementing regulations. Concurrently with the entering into effect of the PRC Foreign Investment Law on 1 January 2020, the special joint venture forms of Sino-foreign equity joint ventures and Sino-foreign cooperative joint ventures have been abolished. Thus, in the Negative List 2020 and the FTZ Negative List 2020 these special joint venture forms are not mentioned anymore. The Negative List 2019 and the FTZ Negative List 2019 stated that investments in market surveys and medical institutions are limited to (equity) joint ventures and cooperations, i.e. cooperative joint ventures. Now, the Negative List 2020 and the FTZ Negative List 2020 state that investments in market surveys and in medical institutions “are limited to joint ventures”. In other words, content wise, there is no change.
b. Newly-added exceptions to restrictions and prohibitions
In the Negative List 2020 and the FTZ Negative List 2020, it is newly added that, after being examined by the relevant competent department of the State Council and after having been approved by the State Council, for specific foreign investments, exemptions from the restrictions set out in the Negative List 2020 and the FTZ Negative List 2020 are possible. However, details, such as on the requirements, the procedures and the required application documents, are not specified.
3. Further Opening Up according to the Master Plan for the Construction of the Hainan Free Trade Port
On 1 June 2020, the PRC State Council issued the Master Plan for the Construction of the Hainan Free Trade Port (“Hainan FTP Plan”). According to the Hainan FTP Plan, restrictions on foreign investments within the Hainan Free Trade Port may be further eliminated compared to the Negative List 2020 and the FTZ Negative List 2020. This especially applies for finance, telecommunications and education sectors. A separate negative list for foreign investment access to Hainan Free Trade Port is expected to be formulated and promulgated later.
a) Finance
According to Articles 2.11 and 3.6 of the Hainan FTP Plan, the opening up of the financial industry in Hainan Free Trade Port shall be expanded. For example, qualified overseas securities, fund and futures operation institutions shall be allowed to establish wholly-owned or joint venture financial institutions in the Hainan Free Trade Port.
b) Telecommunications
In accordance with the Negative List 2020 and the FTZ Negative List 2020, investments in telecommunications companies are still limited to the telecommunications business opened according to China's WTO accession commitments. The shareholding ratio of foreign investors in a value-added telecommunications business (excluding e-commerce business, domestic multi-party communications, store-and-forward and call center) shall not exceed 50%. Also, the basic telecommunication business must be controlled by the Chinese party.
According to Article 2.18 of the Hainan FTP Plan, however, value-added telecommunications services shall be opened up for foreign investors and the restrictions on the shareholding ratio of foreign investors shall be gradually lifted. Also basic telecommunications services in Hainan Free Trade Port shall be opened up for foreign investment.
c) Education
According to Article 3.12 of the Hainan FTP Plan, overseas high-level universities for science, engineering, agriculture and medicine, as well as vocational colleges shall be allowed to engage in independent schooling operations and to set up international schools in Hainan Free Trade Port.
4. Conclusion
The Negative List 2020 and the FTZ Negative List 2020 further reduce restrictions and prohibitions regarding foreign investments in certain industries.
However, in certain key areas, restrictions still apply:
E.g., foreign investments regarding (i) rare earths, (ii) news agencies, (iii) editing, publishing and production of books, newspapers, periodicals, audio-visual products and electronic publications, (iv) all levels of broadcasting stations, television stations, radio and television channel and frequency, radio and television transmission networks and the engagement in the video on demand business of radio and TV, (v) radio and television program production and operation as well as (vi) film production companies, distribution companies, cinema companies and the introduction of films are still prohibited.
Foreign investments in industries, such as (i) printing of publications, (ii) telecommunications companies and value-added telecommunication services, (iii) internet news services, online publishing services, online audio-visual program services, internet culture operation (excluding music) and internet public-oriented information releasing services, (iv) legal services, (v) market surveys, (vi) pre-school institutions, senior high schools and institutions of higher learning, (vii) medical institutions and (viii) the manufacturing of vehicles (other than special purpose vehicles, new-energy vehicles and commercial vehicles) are still restricted.
In conclusion, the trend of the last years to further open up and to reduce restrictions and prohibitions of foreign investment in the PRC is continued by the Negative List 2020 and the FTZ Negative List 2020. This is, without any doubt, positive and will bring along new and extended possibilities for foreign investors in the PRC. However, it is to be hoped that in the next years access to the Chinese market will still be further opened up to foreign investors.
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