China, with its huge market, comprehensive industry chain, and rapidly rising scientific and technological strength, is increasingly favored by international investors. According to the Foreign Investment Department of China’s Ministry of Commerce, from January to December 2017, there were 25,652 newly approved foreign-invested enterprises – an increase of 27.8% from the year before – and the actual total of foreign investment reached RMB 877.56 billion (approximately USD 131.04 billion), up 7.9% from 2016.
The Chinese government has also been working to create a transparent, fair, and friendly investment environment for foreign investors. In order to do this, an important measure is the Negative List for Foreign Investment Access that has been issued by the National Development and Reform Commission and the Ministry of Commerce for the past few years. The Special Administrative Measures (Negative List) for Foreign Investment Access (2018 Edition) (the “2018 Negative List”) has been in force since July 28, 2018, and is regarded as a genuine Negative List, aimed at solving the problems of foreign investment access.
First, the 2018 Negative List clarifies the basic principles of foreign investment access. According to whether foreign investment access in certain areas is permitted or not, the 2018 Negative List clarifies applicable regulations. Foreign investors are prohibited from investing in certain areas specified by the 2018 Negative List. Permission for foreign investment must be obtained prior to investing in Non-Prohibited Investment Areas identified in the 2018 Negative List. When investment is made in areas for which there are equity requirements, no foreign-invested partnership may be established. When a foreign investment is made in areas other than those prohibited by the 2018 Negative List, the law and regulations governing domestic investment will apply, and additional restrictions for foreign investment access may not be imposed.
The 2018 Negative List also significantly relaxes the access restrictions of foreign investment for certain areas, reducing the number of such areas to 48 from the 63 listed in the 2017 Edition. For example:
- In the financial area, the 2018 Negative List eliminates the prohibition against the possession of equity in a Chinese-funded commercial bank by a foreign financial institution (and the subsidiaries it controls) or the aggregate equity held by multiple foreign financial institutions (and the subsidiaries they control) of more than 20% or 25%, respectively. It also relaxes the foreign equity ratio in securities companies, securities investment fund management companies, futures companies, and life insurance companies to 51%.
- In the infrastructure area, it eliminates the requirement that a controlling stake must be held by a Chinese party in the construction and operation of power grid and railway arterial networks.
- In the transport area, it eliminates the requirement that a controlling stake must be held by a Chinese party in the railway passenger traffic and the international shipping agency sectors, and eliminates the rule that foreign investment in the international maritime transport sector must be limited to the form of equity joint venture or cooperative joint venture.
- In the manufacturing area, it eliminates the prohibition of foreign equity ownership in complete special vehicle manufacturing companies or complete new energy vehicle manufacturing companies, and eliminates the requirement that a controlling stake must be held by a Chinese party in the areas of design, manufacturing, and repair of vessels (including segmentation), and eliminates the rule that foreign investment in the areas of design, manufacturing and repair of general purpose aircraft must be limited to the form of equity joint venture or cooperative joint venture.
- In the agriculture area, it eliminates the requirement that a controlling stake must be held by a Chinese party in the areas of new crop varieties cultivation and seed production, and the restriction on foreign investment access to the acquisition and wholesale of rice, wheat and corn.
- In the resources area, it eliminates the prohibition of foreign investment access to the extraction of graphite, smelting and separation of rare earth, and tungsten smelting.
A policy of orderly opening-up is adopted in the 2018 Negative List, which provides a transitional period leading up to the cancellation or relaxation of the access restrictions for certain areas. For example, according to the 2018 Negative List, in the financial area, restrictions on foreign share ratios in securities companies, securities investment fund management companies, futures companies, and life insurance companies will be lifted in 2021. In the vehicle manufacturing area, the foreign-investment ratio in commercial vehicle manufacturing will be eliminated in 2020, the restriction on foreign-investment ratio in passenger-car manufacturing will be eliminated in 2022, and the rule that a foreign company may establish no more than two joint ventures for the production of similar vehicle products in China will be lifted in 2022. This shows that the Chinese government will adopt a more open attitude for foreign investment in the future, which sends a clear and positive signal to foreign investors.
At the same time, the 2018 Negative List also makes a modest reservation: Cultural and financial areas that are not listed in the 2018 Negative List, and related measures for administrative approval, qualifications, and national security, shall be subject to the current regulations of China.
We believe that with the continued update and implementation of the Negative List, China will become an important investment destination that foreign investors cannot afford to ignore. We at Boss & Young are very pleased to provide foreign investors with professional legal advice on investing in China.
By Anne Yuan, Partner, Boss & Young, Attorneys-at-Law
This Article was originally published in Issue 5.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
