China: China Relaxes Some Restrictions On Foreign Investment In China's Pilot Free Trade Zones

The General Office of China's State Council posted on June 16 the Special Measures on the Administration of Entry by Foreign Investment in Pilot Free Trade Zones (Negative List) (2017 edition) (Guobanfa [2017] No. 51, dated June 5 and effective July 10) (click here) ("Measures").

1. Negative List for Foreign Investment in Pilot Free Trade Zones (PFTZs)

The Measures, including the Negative List 2017 edition, repeal and replace the 2015 edition and consist of 95 items across 15 sectors and 40 industries. The Measures specify those industries in which foreign investment remains prohibited or restricted in China's PFTZs. The Measures mark a reduction of 27 items and 10 industries from the 2015 edition. For all industries not on the negative list, foreign investment will not require government approval; instead, foreign investors may establish a company through a simplified filing process provided that the industry is open to private investment.

Foreign investment in the PFTZs (which now consist of 11 provincial-level jurisdictions)¹ nevertheless remains subject to other laws and regulations on the administration of national security, public order, public culture, financial prudence, government procurement, subsidies, special procedures, NGOs, and taxation. In particular, foreign investment in PFTZs which impacts national security must undergo a security examination under the Provisional Measures on National Security Examination of Foreign Investment in Pilot Free Trade Zones (which became effective in parallel with the Negative List 2015 edition, "National Security Provisional Measures"). As the National Security Provisional Measures apply to foreign investment relating not only to national defense but also to economic stability, basic social order, cultural security, public morals, network security and research on technology related to national security, a wide variety of foreign investments in PFTZs are subject to national security review.

2. Negative List 2017 Edition vs. 2015 Edition

The Measures mark a reduction of the 27 items in which restrictions have been removed or relaxed in the 2017 edition. In particular, they include 2 in the mining sector, 10 in the manufacturing sector, 2 in the transportation services sector, 1 in the information technology services sector, 4 in the financial services sector, 4 in the leasing and commercial services sector, 1 in the education sector and 3 in the cultural, sports and entertainment sector. The 27 items are listed in the appendix.

3. Negative List 2017 Version vs. Draft Guiding Catalogue

Much of the Negative List 2017 edition mirrors the changes made by the new edition of the Catalogue for the Guidance of Foreign Investment Industries (a draft of which was released late last year, click here), including reducing the number of sectors that are restricted or prohibited to foreign investors and reducing the number of industries in which foreign investors can participate only through a joint venture with Chinese partners or are subject to an equity cap. This includes removing restrictions in specific mining, manufacturing, education, financial services and culture, sports and entertainment industries.

It is, however, more comprehensive and goes further in removing other restrictions on foreign investment than under the draft Catalogue, including certain restrictions in:

• Design and manufacture of general aircraft weighing 6 tons or less with up to 9 seats (remain subject to joint venture structure under the draft Catalogue);
• Investment in business premises providing Internet access services (remains prohibited under the draft Catalogue);
• Performance managing agencies that provide services in the PFTZ provinces or municipalities (the controlling interest held by the Chinese party under the draft Catalogue).

The Negative List is more specific than the draft Catalogue in respect of market entry and business scope in some sectors. For instance, in the draft Catalogue, the restrictions in financial services sectors remained largely intact, while the 2017 edition allows a slightly wider opening to foreign investment in the banking and insurance industries compared to the 2015 edition. Take insurance industry, the Negative List 2017 edition has deleted the requirement for regulatory approval of affiliated reinsurance transactions (both ceding-in and ceding-out), while retaining the equity cap on foreign investment in life insurance and insurance asset management companies (industry 28 item 56) and qualification requirements for foreign shareholders (industry 28 item 57).

4. Conclusion

Foreign investment growth throughout 2016 is relatively flat. The State Council earlier this year published the Notice on Several Measures on Increasing of Openness to Foreign Investment and Active Use of Foreign Investment to assure expanded openness to foreign investment (for our client alert on the State Council Measures, please click here). At the State Council's executive meeting on June 7, Premier Li Keqiang also stressed the importance of providing a supportive business environment to attract more foreign investment (click here).

The changes in the Negative List 2017 edition, although consistent with China's commitment to offer more liberal market entry requirements to foreign investment, remain modest in such critical sectors as financial services and telecommunications in which foreign investors have long sought greater access and a level playing field with Chinese investors. In addition, such modest openings are unlikely to compensate for the structural and macro-level issues deterring foreign investors from entering China, such as technology transfer requirements under the Cybersecurity Law and recent capital control measures. There are also concerns that the National Security Provisional Measures will impose restrictions on foreign companies that, if strictly applied, could undermine the opening.

It is worth noting that compartmentalizing the market by province will also impact the ability to do business. Foreign investors are required to obtain separate approvals or filings to conduct business activities in each PFTZ. Moreover, foreign investment within PFTZs may have difficulty rolling out business nationwide or in the other 21 provinces, especially in sectors where market access has not been wholly or partially opened up outside PFTZs²). 

Footnotes

1 The 11 PFTZs are Shanghai (2013); Guangdong, Tianjin, and Fujian (2015); and Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, and Shanxi (2017).

2 For instance, the scope of Internet access services (providing Internet access services for Internet users) shall be limited to the Shanghai FTZ. See  www.miit.gov.cn/n1146295/n1652858/n1652930/n3757020/c3764637/content.html

Appendix – 27 Restrictions to be Removed or Relaxed in the Negative List 2017 Edition

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