On 7 December 2016, China's National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) released a draft 2016 version of the "Catalogue for the Guidance of Foreign Investment Industries" (Catalogue) for public comment until 6 January 2017.
The draft was issued following the recent reform of the foreign invested enterprise (FIE) approval regime. The special administrative measures on access of foreign investments (Negative List) section of the Catalogue will be used to determine whether foreign investments in relevant industries will be subject to the approval of MOFCOM or its local branches.
The new draft also promises to open up a significant number of currently restricted and prohibited sectors to foreign investors. Compared to the current version of the Catalogue, which was issued on 10 March 2015, the draft Catalogue reduces the number of restrictive measures (i.e. limitations on ownership of shares, restricted items and prohibited items) from 93 to 62.
1. Integration of the Negative List
Under the Decision on the Amendment of Four Laws¹ including the Law of the People's Republic of China on Wholly Foreign Owned Enterprises (Decision) that took effect last October, a recordal system for the establishment and administration of corporate changes of FIEs in "industries that are not subject to special administration measures for entry" is now implemented on a nationwide basis (please click here to see our previous alert on the recordal system). In implementing the Decision, MOFCOM and NDRC jointly issued Announcement No. 22 of 2016 (Announcement No. 22) in October, specifying that the scope of "the special administration measures for entry" should be determined by reference to the encouraged items (subject to share ownership limitations), restricted items and prohibited items in the 2015 version of the Catalogue.
Corresponding to the approach set out under Announcement No. 22, the draft Catalogue lists the encouraged items subject to limitations on foreign equity ownership, restricted items and prohibited items into the Negative List, thereby consolidating the restrictive measures under the Negative List section of the Catalogue. As a result, the draft Catalogue groups industries under two main categories: (a) encouraged, and (b) the Negative List. Industries not appearing on the list are classified as "permitted". Foreign investors can simply refer to the Negative List to see whether their investments are subject to MOFCOM approval.
2. New Market Entry Opportunities
The draft Catalogue opens up new market entry opportunities for several industries, such as the following:
2.1 Transportation and Service industry
- highway passenger transport service (from "restricted" to "permitted")
- ocean shipping tally companies (from "restricted" to "permitted")
- credit investigation and rating service (from "restricted" to "permitted")
- manufacturing of track transportation equipment (lifting of shareholding limitation)
- manufacturing, research and development of automobile electronic devices (lifting of shareholding limitation)
- manufacturing of motorcycles (from "restricted" to "permitted" and shareholding limitation is also lifted)
- processing of edible oil and fats (from "restricted" to "permitted" and shareholding limitation is also lifted)
- processing of rice, flour and crude sugar (from "restricted" to "permitted")
- corn deep-processing (from "restricted" to "permitted")
- production of biological liquid fuels (from "restricted" to "permitted" and shareholding limitation is also lifted)
- exploration and development of coal bed methane, oil shale, oil sands and shale gas (lifting of shareholding limitation)
- exploration and exploitation of precious metals (from "restricted" to "permitted")
- exploitation and dressing of lithium ores (from "restricted" to "permitted")
Under the draft Catalogue, the encouraged items subject to limitations on foreign share ownership are now also listed in the Negative List. The draft Catalogue specifies that these items will continue to enjoy preferential policies available to industries listed under the "encouraged" category.
3. National Treatment of Foreign Investments
Eleven sectors were removed from the draft Catalogue as foreign investments and domestic investments in these sectors are subject to the same restrictions. These sectors include, for example, construction and operation of large-scale theme parks, construction of golf courses and villas, projects endangering the safety and performance of military facilities, as well as the gambling and lottery industry.
The draft Catalogue marks another step towards the further opening up of certain sectors of the Chinese economy to foreign investment, and the Negative List will serve as a reference for foreign investors to determine whether their investments are subject to MOFCOM approval under the new FIE recordal system. However, some might argue that this change is more in form than substance as the Negative List still includes shareholding restrictions and requires MOFCOM approvals for certain key industries such as telecommunications and finance. As such, while the draft Catalogue will no doubt be welcome by many foreign investors, some may find their hopes tempered by the Negative List.