China’s newly announced “Negative List” regime will loosen market-entry restrictions for foreign investors in certain locations from 1 December 2015, with the relaxation being rolled out nation-wide by 2018. Foreign investment enterprises (FIEs) in sectors or activities not listed in the Negative List can be established simply by a company-registration procedure, with no approvals required. The Negative List – which is yet to be issued – is intended to improve the openness, fairness and transparency of the Chinese market.

China’s State Council published the Opinion on the Implementation of the Negative List Market Entry System (Opinion) on 19 October 2015. The Opinion reflects the negative list approach that was first applied in the Shanghai Free Trade Zone (FTZ), and was later introduced to FTZs in Guangdong, Fujian and Tianjin. Implementation of a negative list approach is also part of the draft Foreign Investment Law and the US-China Bilateral Investment Treaty negotiations.

HIGHLIGHTS

Nationwide uniformity

The Negative List will set out restrictions that apply uniformly to both domestic and foreign investors. It will also include a separate list for the specialized management of foreign investment.

The Opinion requires the relevant departments (likely led by the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission) to follow “pre-establishment national treatment” principles when drafting the Negative List.

The Negative List will be published by the State Council. Local governments may make changes to the Negative List; however, any adjustment made by local governments must be approved by the State Council.

Trial locations

The Negative List will be introduced in certain trial locations from 1 December 2015. The trial locations, however, have not yet been announced. The Opinions nevertheless state that the Negative List will be rolled out across China by 2018.

Market access

The Negative List will restrict investment and other market access conduct in sectors involving national security, significant production capability, strategic resources, and significant public interest. It will also reflect industry-specific approvals.

In particular, the Negative List will set out sectors and activities that are (i) prohibited to investment (whether Chinese or foreign), (ii) restricted to investment (whether Chinese or foreign), and (iii) subject to special management for foreign investors.

  • If a sector or activity is listed as prohibited, then investment is not permitted.
  • If a sector or activity is restricted, then either (i) governmental approval will be required, or (ii) investment may be subject to conditions and requirements in accordance with relevant laws and regulations. The conditions and requirements may include restrictions on qualification, equity proportions, business scope, business form, commercial mode, location, and state-owned land development protection. Investors may also be required to give written commitments that the enterprise will undertake its legal obligations, bear “social responsibility” and practice “social loyalty” and honesty. It is unclear at this stage whether the concepts of “social responsibility” and “social loyalty” will include a direct political element.
  • For sectors and activities not in the Negative List, investors may establish an enterprise without being subject to governmental approval.

The Opinion promises simplified approval procedures, an improved national security inspection regime and strengthened supervision. The Opinion also refers to the establishment of the foreign investment information reporting system, a system first contemplated in the draft Foreign Investment Law circulated by MOFCOM in January 2015 (see our e-bulletin dated 23 January 2015).

Business registration reform

The Opinion confirms that one consolidated certificate will be issued to replace an enterprise’s business licence, enterprise organization code certificate and tax registration certificate. This follows on from a regulation issued in August 2015 by the Administration for Industry and Commerce (the authority which issues business licences), and suggests an acceleration of this reform.

LOOKING FORWARD

Big changes are on the way for foreign investment in China:

  • The Negative List will hopefully get rid of the approval process for many foreign investment projects, thereby simplifying life for many foreign investors in China. This, of course, depends on whether the Negative List is long or short.
  • The Negative List, and the locations in which it will apply from 1 December 2015, can be expected in the coming weeks. Foreign investment opportunities in those locations will likely improve.
  • Various laws and regulations will need amending to be consistent with the Opinion and the Negative List.
  • The Opinion is an important step toward the enactment and implementation of the Foreign Investment Law, an overhaul of China’s foreign investment regime that is still on the legislative agenda. (For more about the draft Foreign Investment Law, see our e-bulletin dated 23 January 2015.)
  • Over time, government intervention in the market – at least in sectors and activities not covered by the Negative List – will decrease. This should result in a more transparent and open market environment.