On 27 December 2021, the PRC National Development and Reform Commission (“NDRC”) and the PRC Ministry of Commerce (“MOFCOM”) jointly issued the new Special Administrative Measures (Negative List) for Foreign Investment Market Access, 2021 Version (“Negative List 2021”) and the new Special Administrative Measures (Negative List) for Foreign Investment Market Access to Pilot Free Trade Zones, 2021 Version (“FTZ Negative List 2021”). Both, the Negative List 2021 and the FTZ Negative List 2021 (jointly “New Negative Lists”) entered into effect on 1 January 2022. Simultaneously with the entering into effect of the New Negative Lists, the previous and FTZ Negative List 2020 ceased to be effective.

Below is an overview on the key changes brought by the New Negative Lists.  

1. Changes in the Restricted or Prohibited Items of the New Negative Lists

In comparison to the previous Negative List 2020 and FTZ Negative List 2020, the New Negative Lists have further reduced restrictions and prohibitions on foreign investment. Compared to the Negative List 2020, the new Negative List 2021 has reduced restrictions and prohibitions from 33 to 31 sectors. Compared to the FTZ Negative List 2020, the new FTZ Negative List 2021 has reduced restrictions and prohibitions from 30 to 27 sectors. I.e. the Negative List 2021 has reduced restrictions and prohibitions by 6.1%, and the FTZ Negative List 2021 has reduced restrictions and prohibitions by 10%. Both the Negative List 2020 and the FTZ Negative List 2020 contained 12 categories of restrictions and prohibitions. Now, the Negative List 2021 continues to have 12 categories, while the FTZ Negative List 2021 contains 11 categories only. There is no category of "manufacturing industries" in the FTZ Negative List 2021. This means that there is no more restricted or prohibited manufacturing industry for foreign investment in the PRC Pilot Free Trade Zones ("FTZs") since 1 January 2022.

Key changes are as follows:   

a) Further releasing restrictions on access to 2 manufacturing industries

Manufacturing of vehicles

The Negative List 2020 and the FTZ Negative List 2020 provided that, except for special purpose vehicles, new-energy vehicles and commercial vehicles, the shareholding ratio of Chinese shareholders in a whole vehicle manufacturer shall be at least 50 percent, and one foreign investor may establish up to two joint ventures in China to manufacture the same type of vehicles. In 2022, the limits on the foreign shareholding will be abolished for passenger vehicles, and the restriction that one foreign investor may establish up to two joint ventures in China to manufacture the same type of vehicles will be eliminated as well. Therefore, such restrictions have now been removed from the New Negative Lists.

This means that since 1 January 2022 there is no restriction on the foreign shareholding ratio in companies manufacturing whole vehicles, i.e. foreign investors are now allowed to establish wholly foreign-owned enterprises ("WFOE") for whole vehicle manufacturing (including special purpose vehicles, new-energy vehicles, commercial vehicles, passenger vehicles). Further, there is no restriction on the number of joint ventures to be founded by foreign investors in China to manufacture the same type of vehicles.

Manufacturing of ground receiving facilities and key parts for satellite television broadcasting

Foreign investors were not allowed to invest in the manufacturing of ground receiving facilities and key parts for satellite television broadcasting under the Negative List 2020 and the FTZ Negative List 2020. The New Negative Lists have removed such restriction.

b) Further pilot opening-up on service industries in FTZs

According to both, the Negative List 2020 and the FTZ Negative List 2020, foreign investment in social surveys was prohibited while foreign investment in market surveys was limited to Sino-foreign joint ventures. Specifically, the investment in broadcasting and television listening and rating surveys had to be controlled by the Chinese party. Under the FTZ Negative List 2021, foreign investment is allowed in social survey business, however, only in the form of a Sino-foreign joint venture with a Chinese shareholding ratio of not lower than 67% and the legal representative of the joint venture shall be of Chinese nationality. Foreign investment in market survey business is in general no longer limited to the form of a Sino-foreign joint venture except that joint ventures engaging in broadcasting and television listening and rating surveys shall still be controlled by Chinese investors. 

c) Clearer scope of application of the New Negative Lists

It is newly added as a general remark in the New Negative Lists that foreign-invested enterprises ("FIEs") investing in China / FTZs shall comply with the relevant requirements of the relevant New Negative Lists. That domestic investments by FIEs within the PRC shall also be subject to the relevant laws and guidelines on foreign investment market access is not new and has always been implemented by the PRC authorities. According to the currently still valid Interim Provisions on Domestic Investment by FIEs (enacted by the former PRC Ministry of Trade and Economic Cooperation and the former State Administration for Industry and Commerce effective as of 1 September 2000), domestic investments by FIEs shall be implemented according to the Interim Provisions on Foreign Investment Guidelines and the Guiding Catalogues of Foreign Investment Industries. Such rule aims at preventing foreign investors from circumvention of the market access requirements by, for instance, making investments in restricted or prohibited sectors through FIEs. Although nowadays the relevant guidelines and guiding catalogues for foreign investment have been reformed into the system of negative lists, the principle has remained that FIEs, which are actually domestic companies, shall also follow the applicable negative list when investing within the PRC / FTZs. Such principle is also consistent with the Implementing Regulations of the Foreign Investment Law (enacted by the PRC State Council effective as of 1 January 2020) which stipulate that the Foreign Investment Law and the relevant provisions in its Implementing Regulations shall apply for domestic investments by FIEs. Now, this principle has been re-confirmed and concretized under the New Negative Lists.

Another new remark in the Negative Lists is that, when a domestic enterprise engaging in activities in any field prohibited from foreign investment under the New Negative Lists goes public overseas, it shall be subject to review and approval by the relevant Chinese authorities. No overseas investors are allowed to participate in the operation and management of such domestic enterprise, and the equity ratio of overseas investors in such domestic enterprise shall be governed mutatis mutandis by the relevant regulations on the management of domestic securities investments made by overseas investors. (According to the explanation of the MOFCOM, such equity ratios refer to foreign investors investing in domestic securities market through "qualified foreign institutional investors" (QFII), "RMB qualified foreign institutional investors" (RQFII), stock market transaction interconnection mechanism, etc., i.e.: (1) the equity ratio of a single foreign investor and its affiliates shall not exceed 10% of the total number of the company shares; (2) the total equity ratio of all foreign investors and their affiliates shall not exceed 30% of the total number of the company shares.)

Whether or not the New Negative Lists have an impact on certain special investment vehicles for overseas IPO is not fully clear for the time being. For instance, many PRC enterprises like many internet technology giants are using the VIE model to enable overseas IPO. They first establish an overseas company (e.g. a BVI company), such overseas company controls and manages the domestic entities through various contractual relationships and then use the overseas company for financing and listing purpose, i.e. they go public overseas indirectly. It is possible that their domestic business falls under certain prohibited sectors in the New Negative Lists (e.g. internet news information service, network publication service, network audio-visual program service, electronic map making for navigation). From a technical legal point of view, the current PRC legislation and administration does not explicitly define overseas IPO via the VIE model as a type of "(indirect) overseas IPO by domestic enterprises". Accordingly, it is very likely that, for the time being, the VIE model and other similar investment vehicles for indirect overseas IPO are not yet affected by the New Negative Lists even if the relevant domestic enterprises are engaging in any prohibited sectors under the New Negative Lists.

However, China Securities Regulatory Commission has been seeking public comments for the draft of the Administrative Provisions of the State Council on Domestic Enterprises Issuing Securities and Listing Overseas since 24 December 2021. This draft defines "indirect overseas IPO by domestic enterprises" explicitly for the cases where domestic enterprises having their main business activities within the PRC issue securities or list them overseas in the name of an overseas enterprise and based on the equities, assets, earnings or other similar rights and interests of such domestic enterprises. If and after this draft will be officially promulgated, the VIE model and other similar investment vehicles for indirect overseas IPO will be subject to additional statutory approvals by the competent authorities, if the business of the relevant domestic enterprises touches upon any prohibited sectors under the New Negative Lists. It appears to be the intention and tendency of the Chinese lawmaker to prevent domestic investors from using overseas financing to invest in industrial sectors that are prohibited for foreign investment.

2. Conclusion

The Negative Lists have further reduced restrictions and prohibitions regarding foreign investments mainly in the manufacturing industries and service industries (applicable to free trade zones only). This is in accordance with the general tendency in the PRC legislation towards national treatment of foreign investment. As long as the system of negative lists still exists, the national treatment of foreign investment cannot be achieved completely. Therefore, it is to be hoped that there will be further reduction in the remaining restrictions and prohibitions in the future. On the other hand, the newly added remarks send out a clear signal to foreign and domestic investors that the Chinese government is closely monitoring developments in the domestic and global industrial sectors and capital markets in order to implement market access control on foreign investment in a more complete and consequent manner.