Updates to China’s negative list

It is now 40 years since China embarked on its reform and opening up policy under then Premier, Deng Xiaoping. The policy has led to a staggering rise in growth and personal incomes in China while simultaneously giving a fillip to the broader global economy. Foreign Direct Investment (FDI) into China reached a record $136 billion in 2017 though complaints abound from other countries about restrictions on foreign firms doing business here and what they see as the lack of a level playing field between local and foreign companies. In these uncertain times of increased protectionism from some quarters, the Chinese government is keen to show the world that it is open for business, committed to its path towards globalization and a welcoming place for foreign companies to operate.

As part of this continuing opening up effort, on June 28 last the 2018 Special Administrative Measures on Access to Foreign Investment(“2018 Foreign Investment Negative List” or “2018 FI Negative list”), was issued by the Ministry of Commerce and the National Development and Reform Commission (NDRC). This will replace the previously enacted 2017 Catalogue for Guiding Foreign Investment.

A negative list was first rolled out in the Shanghai Free trade Zone in 2013 and was subsequently extended to the other FTZs. The Negative List identifies those industries that are either restricted for or totally off-limits to foreign investors. Restricted items may require a foreign player to cooperate through a Joint Venture (JV) with a local partner or to seek permission from the Ministry of Commerce (MOFCOM) to operate. The 2017 list identified 63 items while the 2018 version, due to come into effect on July 28th, has reduced this to 48. “The new round of opening-up will provide new impetus for attracting more foreign investment, promoting market competition and raising innovation capability,” according to the NDRC. Sectors targeted for immediate opening up to foreign investment include, transport, infrastructure, energy, resources and agriculture.

Certain sectors include a timeline for a more gradual opening up; for example, foreign investors will now be allowed to own a controlling stake in companies involved in the manufacture of new energy vehicles with plans to extend this relaxation to commercial vehicles by 2020 and passenger vehicles by 2022. Similarly, insurance and securities firms, previously limited to a minority shareholding, will now be permitted to hold 51% of shares. There are plans to scrap these limits completely by 2021.

There is some skepticism about some of the measures. Some areas that have been opened up are, in reality, dominated by state owned companies and foreign players would face significant barriers to entry. For example, restrictions on foreign investment in power grids and railway transportation have been lifted completely but good luck to any foreign investor who might wish to take on the state run behemoths operating in these spheres. Overall the new measures should be greeted with cautious optimism but careful analysis is still advised for your own particular case.

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