China further opens market access for foreign investors

For decades foreign investment into China has been subject to approval by the competent Authority of Commerce and registration with the competent Administration for Industry and Commerce. Also, not all industry sectors were open to foreign investment. The Guideline Catalogue of Foreign Investment Industries (“Guideline Catalogue”) distinguished between industry sectors, in which foreign investment was encouraged, permitted, restricted and prohibited. The Guideline Catalogue also stipulated whether in a certain sector wholly foreign-owned enterprises (“WFOEs”) are allowed or only joint ventures were possible and whether in joint ventures the Chinese shareholders must have majority or controlling shares. Recently, the above system has been gradually reformed and China moved to the so called negative list approach, i.e. the approval requirement has been abolished and foreign investment is now only subject to recordal at the competent Authority of Commerce and registration with the competent Administration for Industry and Commerce, unless the project (both green-field investments and acquisitions) falls into industry sectors which are listed in the so called Negative List. In case of the latter, the project remains subject to approval by the competent Authority of Commerce. There are different Negative Lists for free trade zones (“FTZ”) and for areas outside of FTZs.

In the past months the Chinese central government and the National Development and Reform Commission (“NDRC”) had already announced that the current restrictions on foreign investment will be further eased.

1. On 28 June 2018, the NDRC and the Ministry of Commerce (“MOC”) jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (“Negative List 2018”). It basically implements the promises on removing certain restrictions for foreign investment that had been published in the past months and will take effect from 28 July 2018. Compared to the last version of the Negative List published in 2017, which basically referred to the Guideline Catalogue, the Negative List 2018 uniformly lists the special administrative measures on foreign investment access such as shareholding requirements and control requirements directly in the Negative List. Further, it introduces a transitional period for canceling or easing access restrictions in certain industry sectors. Also, the length of the Negative List 2018 has been further shortened from 63 items to 48 items and the market accesses in 22 industry sectors have been liberalized. The above include cancellation of the restriction on foreign shareholdings in the banking industry and in special purpose motor vehicles and new energy automobiles. The main changes of Negative List 2018 are summarized as below: Expanding the opening of service industry sectors
   • In the financial industry sector, the restriction on foreign shareholdings in the banking industry has been canceled. Foreign maximum shareholding ratios in security companies, fund management companies, futures companies and life insurance companies have been increased to 51%. The restrictions on foreign shareholding ratios in all financial sectors will be cancelled in 2021.
   • In the infrastructure sector, the restrictions on foreign investment in construction and operation of cargo railway networks and power grids have been cancelled.
   • In the transportation sector, the restrictions on foreign investment in railway passenger transportation companies, international maritime transport and international shipping agencies have been cancelled.
   • In the business trade sector, the restrictions on foreign investment in petrol stations, grain purchasing and wholesale have been cancelled.
   • In the cultural sector, the prohibition of foreign investment in venues to provide internet access has been cancelled.
   Further opening of manufacturing industry
   • In the automobile industry, the restrictions on foreign shareholding ratios for the manufacturing of special purpose motor vehicles and new energy automobiles have been cancelled. The restrictions on foreign shareholdings for the manufacturing of commercial vehicles will be cancelled in 2020. The restrictions on foreign shareholdings and the limitation to up to two joint venture companies per foreign investor for manufacturing of passenger cars will be cancelled in 2022.
   • The restrictions on foreign shareholdings in the shipping industry have been cancelled, including design, manufacturing and reparation.
   • The restrictions on foreign shareholdings in the aircraft industry have been cancelled, including cargo aircrafts, regional aircrafts, utility aircrafts, helicopters, unmanned aerial vehicles, and aerostats.
   • The manufacturing of arms and ammunition is no longer listed in the Negative List 2018, which means it is permitted.
   Opening access to agriculture and energy resource fields
   • In the agriculture sector, the restrictions on foreign shareholdings in the breeding of new varieties and production of crop seeds, except for wheat and corn, have been cancelled.
   • In the energy sector, the restrictions on foreign shareholdings in the exploration and exploitation of special and rare coal resources have been cancelled.
   • In the mineral and resources sector, the restrictions on foreign shareholdings in the exploration and exploitation of graphite, smelting and separation of rare earth and smelting of tungsten have been cancelled.
2. On 30 June 2018, the NDRC and MOC also issued the revised negative list for FTZs (“FTZ Negative List 2018”), which will take effect from 30 July 2018. Compared to the FTZ Negative List 2017, the number of the items in the FTZ Negative List 2018 has been reduced from 95 to 45. While compared to the nationwide Negative List 2018, the FTZ Negative List 2018 further removes or loosens foreign access restrictions in additional sectors. The main differences between the nationwide Negative List 2018 and the FTZ Negative List 2018 are as below: Deletion of Restrictions in Three Sectors in FTZs
   • Restrictions on the prospecting and exploitation of petroleum and natural gas by Sino-foreign joint venture and joint cooperation have been cancelled.
   • Prohibition on foreign investment in the smelting and processing of radioactive mineral resources as well as the production of nuclear fuel has been cancelled.
   • Requirements on majority shareholding by Chinese investors of stage performance agencies has been cancelled.
   More Openness in Certain Categories
   • In the agriculture sector, while the nationwide Negative List 2018 caps foreign shareholding ratio at 49% in breeding new wheat and corn varieties and their seed production, the FTZ Negative List 2018 has lifted this cap to 66%.
   • For value-added telecom services, the opening-up measures previously applicable in Shanghai Free Trade Zone will be implemented in all FTZs in China.
   • In the cultural sector, while the nationwide Negative List 2018 prohibits foreign investment in art performance groups, the FTZ Negative List allows foreigners to invest in such groups as a minority shareholder.

The new Negative Lists implement the announcements made by the Chinese authorities in the past months. However, in some important sectors, such as automobiles, the opening up will only come in steps. The question is also, how much foreign automobile OEMs will actually profit from it, since most of them are already present in China with 50:50 joint ventures. Further, some important sectors such as telecommunication are still included in the Negative List. Nonetheless, the changes are a big step forward and show the commitment of Chinese government to further open up the market access to foreign investors step by step.