Negative list breakthrough for foreign investment

Q: Under what background is the Catalogue of Industries for Guiding Foreign Investment (Amended in 2017) introduced, and what principles are reflected in the amendments? A: The Catalogue of Industries for Guiding Foreign Investment (Amended in 2017) was published by the National Development and Reform Commission (NDRC) on its official website on 28 June 2017. The 2017 catalogue will be effective from 28 July 2017, when the Catalogue of Industries for Guiding Foreign Investment (Amended in 2015) is rescinded. The amendments reflect the central government’s determination to further enhance general openness by taking an aggressive approach to heightening openness in industries where investment is allowed, enhancing the transparency of foreign investment access, further reducing restrictions, and loosening controls over merger and acquisition (M&A) by foreign investors. They mark a significant breakthrough in the foreign investment access system.

Our analysis on the full text of the 2017 catalogue finds the amendments mainly reflect three principles. First, the negative list and national treatment are highlighted. Second, they continue to aim at enhancing openness of key areas and loosening controls over access of foreign investment to the tertiary, manufacturing and mining sectors. Third, the policies for “encouraged” industries will remain unchanged.

Q: What are the highlights of the 2017 catalogue?

A: We can see that the 2017 catalogue contains the following material changes relative to the 2015 catalogue:

The first is nationwide implementation of the foreign investment negative list (FINL). The most notable change of the 2017 catalogue, relative to the 2015 catalogue, is the introduction of the FINL, which causes an adjustment to text structure.

The 2017 catalogue, comprising the Catalogue of Encouraged Industries for Foreign Investment and the Special Administrative Measures for Foreign Investment (i.e., the FINL), consolidates “restricted” and “prohibited” industries, as well as “encouraged” industries with restrictions related to equity percentage and officers, into the FINL.

Based on our analysis of the 2017 catalogue, in conjunction with the Interim Measures for the Administration of Incorporation and Modification Filing of Foreign-Funded Enterprises, in effect only filing procedures need to be completed in connection with the incorporation or change of a foreign-funded enterprise insofar as it is not from an industry that is included in the FINL, or an industry imposing the same restrictions on both wholly Chinese-funded enterprises and foreign-funded enterprises. In other words, they will no longer be subject to substantive review. Implementation of the negative list nationwide under the 2017 catalogue, following the success of the pilot Free Trade Zone Negative List, shows the government’s determination to further enhance openness, align with international economic and trade rules of high standards, and build an open economy.

Second, with the 2017 catalogue, China is opening wider to the outside world. The 2017 catalogue contains 35 restricted items and 28 prohibited items. This means that the total number of restrictions and prohibitions is reduced by 30, compared with the 2015 catalogue. Besides, the 2017 catalogue enhances openness of the tertiary, manufacturing and mining sectors, and removes restrictions for sectors that include accounting and audit, credit investigation, and rating services. For the manufacturing industry, the removal of restrictions on access to motorcycle, edible fat and ethanol fuel is notable.

Also, policies for “encouraged” industries remain unchanged under the 2017 catalogue, which continues to encourage foreign investment in sectors conducive to optimizing China’s industrial restructuring, such as high-end manufacturing, modern services, high-tech, modern agriculture, energy saving, and environmental protection.

Aiming at promoting the use of innovative processes, materials, equipment and new technologies, the 2017 catalogue also adds items that are conducive to optimizing China’s industrial restructuring, which include virtual reality and augmented reality equipment, key parts and components of 3D printing devices, formula food for special medical purposes, and urban parking facilities. Finally, restrictions imposed on both wholly Chinese-funded enterprises and foreign-funded enterprises, and restricted areas to which access is banned, are not included in the FINL. Therefore, a foreign investor who enters the Chinese market in the future will have to pay attention not only to the catalogue of industries for guiding foreign investment, but also to the general economic plan of the central government, as well as the Catalogue of Investment Projects Subject to Government Approval, applicable to all market players, that may be amended from time to time.

The notes to the FINL are also worthy of special attention. For example, they prohibit foreign investors from carrying out business activities as privately or individually owned businesses or investors of sole proprietorships. Foreign-funded partnerships are not allowed for projects in the “restricted” category that impose restrictions on the percentage of equity held by foreign investors. To sum up, the notes to the FINL under the 2017 catalogue further clarify through what forms foreign investment can be made in areas on the negative list.

Q: What is your opinion on the implications of the 2017 catalogue?

A: In general, as a significant move to a new level of openness, the 2017 catalogue further loosens controls over foreign investment. Compared with the old foreign investment access system that focused on upfront review and approval, the negative list represents a new philosophy and ideas of administration that are in line with international practices. It marks an innovative change in China’s administrative approach to foreign investment.

However, as the authors expected, no meaningful changes are seen in restrictions on access to financial, telecoms, internet, culture, education and other sectors dominated by Chinese-funded players. The authors believe that the government will take a prudent and progressive approach to opening these sectors to foreign investment.

Author: Hu Bo and Li Xiameng are senior counsel at AnJie Law Firm