On 28 June 2018, the central government departments of the People’s Republic of China (“PRC”) in charge of foreign investment in the country, namely the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”), jointly issued the “Special Management Measures for Foreign Investment Access (Negative List) (2018 Version)” (“2018 Nationwide Negative List”). The 2018 Nationwide Negative List comes into effect on 28 July 2018.
Following the issue of the 2018 Nationwide Negative List, NDRC and MOFCOM on 30 June 2018 jointly issued the “Special Management Measures for Foreign Investment Access in Pilot Free-Trade Zones (Negative List) (2018 Version)” (“FTZ Negative List”, or “Negative Lists” in conjunction with the 2018 Nationwide Negative List). On 30 July 2018, the FTZ Negative List comes into effect, and replaces its earlier version which was issued on 5 June 2017.
This article provides a summary and analysis of PRC’s most recent developments in relation to foreign investment pursuant to the Negative Lists.
End of Foreign Investment Industries Catalogue
From 1995 to 2017, the PRC government formulated and successively released eight iterations of the Catalogue of Industries for Guiding Foreign Investment (“Catalogue”). The industries for foreign investment have been divided into four categories: encouraged, permitted, restricted and prohibited. The Catalogue lists out the industries that fall within the encouraged, restricted and prohibited categories. The industries that are not included in the Catalogue are permitted for foreign investment. The Catalogue has generally reflected the direction of China’s economic development and foreign investment policy during the corresponding period of time.
The latest version of the Catalogue was released by NDRC and MOFCOM on 28 June 2017, and came into effect on 28 July 2017 (“2017 Catalogue”). The 2017 Catalogue consists of two parts: Catalogue of Encouraged Industries for Foreign Investment (“Encouraged Industries Catalogue”) and Special Management Measures (Negative List) for Foreign Investment Access. The second part of the 2017 Catalogue will be replaced by the 2018 Nationwide Negative List on 28 July 2018. This means that the 2017 Catalogue will continue to exist for a transitional time until the Encouraged Industries Catalogue is revised and released as a separate document. The 2017 Catalogue will be the last single document of its kind setting out the encouraged, restricted and prohibited categories of industries for foreign investment in China. With the 2018 Nationwide Negative List coming into effect, the Catalogue will see its original tenor (with the encouraged, restricted and prohibited categories in it) and significance spanning more than 20 years come to an end, with the 2017 Catalogue being the final version.
Changes made by the 2018 Nationwide Negative List to the 2017 Catalogue
China has been increasingly opening the door to foreign investors further since its adoption of a policy of reform and opening up in 1978. While the 2017 Catalogue reduced restrictions and prohibitions set out in the earlier Catalogue which was released on 10 March 2015, the 2018 Nationwide Negative List has further relaxed foreign investment restrictions in certain sectors. This is an indication of the PRC government’s determination to further open up the market to foreign investment and also a reflection of its strategic response to the current global economic situation.
Compared with the 2017 Catalogue, the 2018 Nationwide Negative List has reduced the number of restricted sectors for foreign investment from 35 to 21. Specifically, some of the key changes include:
• Financial services: Elimination of the foreign shareholding limitation in commercial banks; increase of permissible foreign ownership in securities firms, securities investment fund management, futures and life insurance companies up to 51% and, subsequently, 100% in 2021;
• Infrastructure, transportation and trade: Elimination of the foreign shareholding limitation in relation to railway main lines, power grids, railway passenger transportation, international shipping companies, petrol stations and grain purchase and distribution companies;
• Manufacturing: Elimination of the foreign shareholding limitation in companies for manufacturing of special vehicles and new energy vehicles as well as design, manufacturing and repair of vessels and aeroplanes; scheduled elimination of the foreign shareholding limitation in companies for commercial vehicle manufacturing in 2020 and for passenger vehicle manufacturing in 2022;
• Agriculture and energy: Elimination of foreign shareholding limitation in companies for breeding and production of seeds (except wheat and corn), exploration and exploitation of special and rare coals or separation and metallurgy of rare earth.
Restrictions further reduced for foreign investment in free-trade zones
China’s first free trade zone (“FTZ”) was established in Shanghai in 2013. There are now a total of 11 FTZs in designated areas of Shanghai, Guangdong, Fujian, Tianjin, Liaoning, Zhejiang, Henan, Hubei, Sichuan, Shaanxi and Chongqing
The two Negative Lists specify the restricted and prohibited sectors for foreign investment in China. As indicated by their names, the FTZ Negative List applies to foreign investment in FTZs, while the 2018 Nationwide Negative List applies to foreign investment in the relevant sectors throughout the country (or in all areas outside of FTZs).
Foreign investors have wider access to the following sectors in FTZs than other areas in China, as set out below:
1. Breeding and production of wheat and corn
• Maximum foreign shareholding in a company within FTZs : 66%
• Maximum foreign shareholding in a company outside of FTZs : 49%
2. Exploration and development of oil and gas
• Maximum foreign shareholding in a company within FTZs : 100%
• Maximum foreign shareholding in a company outside of FTZs : Must be in the form of a Chinese-foreign joint venture
3. Metallurgy and processing of radioactive minerals; production of nuclear fuels
• Maximum foreign shareholding in a company within FTZs : Foreign investment permitted; its maximum ratio to be further specified
• Maximum foreign shareholding in a company outside of FTZs : Foreign investment prohibited
4. Performance agency
• Maximum foreign shareholding in a company within FTZs : 100%
• Maximum foreign shareholding in a company outside of FTZs : 49%
5. Art performance organisation
• Maximum foreign shareholding in a company within FTZs : 49%
• Maximum foreign shareholding in a company outside of FTZs : Foreign investment prohibited
Relaxation of administrative regime welcomed by foreign investors
Foreign investors are prohibited from investing in any prohibited sector under the Negative Lists. Qualified Hong Kong and Macau investors may continue to enjoy preferential treatment under the Closer Economic Partnership Arrangements between the Governments of Mainland China and Hong Kong or Macau (“CEPA”). For example, a Hong Kong or Macau investor may, under the CEPA, own up to 49% of equity interest in a mainland China art performance organisation, even if such organisation is located outside of FTZs.
Investment in a restricted sector is subject to foreign investment access approval. This means that transaction documents such as a joint venture contract, an equity purchase agreement, a capital subscription agreement and/or an asset purchase agreement must be approved by the competent commerce commission before they can become effective. Such approval also applies to certain activities of existing foreign invested companies in any restricted sector, including the increase or decrease of registered capital, equity change, equity pledge, equity investment, merger, acquisition, split, change of business scope, extension of operational term, termination, dissolution and liquidation.
The administrative regime in relation to foreign investment in encouraged or permitted sectors is more relaxed than that with regard to restricted sectors. For instance, projects in an encouraged or permitted sector are only subject to filing and registration requirements with the relevant governmental authorities. No approval from any commerce commission is generally required for foreign investment in any encouraged or permitted sector or for any activities of existing foreign invested companies. In other words, the parties may agree that their transaction documents become effective upon signing. Along with the most recent reform of the administrative regime, in some cities, transaction documents are no longer required to be submitted for the purpose of filing or registration. However, articles of association should be submitted for filing and registration for projects in an encouraged or permitted sector, and should be approved by the competent commerce commission for projects in a restricted sector.
Both the reduction of the number of restricted sectors and the relaxation of the administrative regime for foreign investment are welcome news for investors. With the issue of the two Negative Lists and the further relaxation of the administrative regime as well as the existing preferential treatments under CEPA or for investments in encouraged sectors, central and western regions of China, FTZs and high and new technology zones, China has been striving to further promote and attract foreign investment into China in a competitive global economy.
For further information, please contact:
Huang Xuhua
+65 6890 7435
[email protected]
Allen & Gledhill China Practice
Through the region, our China Practice has been active in numerous China-related matters, both inbound and outbound, across a variety of practice areas, including mergers and acquisitions, capital markets, private equity and arbitration. Comprising lawyers fluent in Mandarin, and a number of PRC-qualified lawyers, members of our China Practice are specialists in their areas of practice and widely recognised as leading legal experts. Notable China-related transactions in which we have acted include award-winning deals and firsts in the market.
Our multi-disciplinary practice is able to advise and provide support on all aspects of China-related commercial transactions, from fund-raising to the acquisition or disposal of assets, in China or overseas. Clients benefit greatly from the close and seamless collaboration we are able to achieve across our specialist practice areas. We are also able to provide risk management and regulatory advice in relation to China-related dispute matters. Our dispute resolution lawyers regularly act in litigation and arbitration cases involving Chinese parties, and have also rendered expert opinions in courts and arbitral tribunals in China.
Headed by Huang Xuhua, our China Practice is a team of lawyers with deep expertise in applicable areas of law, including PRC investment law. Our familiarity with Chinese culture and the needs of both international and Chinese clientele allow us to offer a legal service that would greatly assist those who seek to harness the unprecedented potential that the growth of the Chinese market continues to present.