After launching the Shanghai Pilot Free Trade Zone (FTZ) nine months ago, the Shanghai government has released the Special Administrative Measures on Foreign Investment Access to the China (Shanghai) Pilot Free Trade Zone (Negative List) (the 2014 Revision) (2014 Negative List). The list seeks to reinforce the requirements that were set out in 2013 and further relax controls on foreign investment into China.

The content of the negative list will continue to be adjusted to increase access for foreign investment. Meanwhile, relevant state government departments, including the Ministry of Transport, People's Bank of China, the State Administration of Foreign Exchange and the State Administration of Taxation, have or are set to release administrative regulations or rules to facilitate the reforms in the FTZ and the implementation of the 2014 Negative List. Due to the success of the reforms, we believe similar reforms will be replicated in other regions in future.

What are the key changes?

Less control over foreign investment sectors

Generally speaking, the 2014 Negative List expands foreign access to more sectors by reducing the number of its controlled items from 190 in the 2013 Negative List to 139. Looking through the restructure of the list, the following points summarise the key changes:

  • Removal of 14 items and relaxation of 19 items on the requirements to further open access to foreign investments:
    • Fourteen items were removed. These focused on services and manufacturing sectors, including restriction on the investment in companies engaged in certification services for import/export goods, the qualification requirement of foreign investors of certification institutions, and restriction on the investment of manufacturing of equipment in respect of general polyester filament and staple fibre.
    • Nineteen items have been relaxed across various industries including manufacturing, infrastructure, real estate, commercial trading, shipping services, professional services and social services. For example, the original restricted item, 'investments into the wholesale and distribution of crude oil, chemical fertilizer, pesticide, agricultural film, refined oil products (including bonded oil)', is now amended to 'investments into the pesticide, agricultural film and bonded oil', relaxing the restrictions on investments into the wholesale and distribution of crude oil and chemical fertilizer. The originally restricted item, shipping agency (equity controlled by a Chinese party), was also relaxed to 'except engaging in the public international shipping agency under which the foreign equity cannot exceed 51%'.

Additional transparency of administrative measures

  • In the 2013 Negative List there were 55 items listed as restricted without specific administrative measures. The 2014 Negative List clarifies the specific requirements for 30 restricted items and how they are administered in practice. For example, the requirements for investment in direct selling are now mean investors to have more than three year's experience in overseas direct selling industry and the minimum paid-in capital of RMB no less than 80 million.
  • In accordance with international practice, 14 items to which domestic and foreign investment are both prohibited or restricted are removed from the 2014 Negative List. Those items are mainly in manufacturing sectors which are energy intensive or high polluting, such as the production of benzidine, dyes and coatings.

Reinstating the Regime

The 2013 Negative List changed the approval system for all foreign invested projects to a combination system of approval and filing. Foreign invested projects and the establishment and modification of foreign invested enterprises (FIEs) in the sectors not covered in the 2013 Negative List (in accordance with the principle of equal treatment of domestic and foreign investors) shall be subject to the filing system rather than the approval system. This is excluding the domestic investment projects that are still subject to the pre-approval system as prescribed by the State Council,. The 2014 Negative List goes a step further to deepen the reforms on the management of foreign investment with the following aspects:

  • Continuing to expand the scope of the filing system: Given the scope of foreign investments, the 2014 Negative List expands the scope of the filing system by the removal and relaxation of items in the 2013 Negative List.
  • Exploring the reforms on the ways of access for the foreign investments: In the 2014 Negative List, for the sectors which can be deployed by the market, it reduces the restrictions on their shareholding of the foreign equity; for the foreign invested sectors which can be regulated by the same measures of domestic investment, it calls off the special restrictions on the access of the foreign investment; for the sectors which can be restricted through management of environment, energy conservation and permit etc, it reduces the restrictions on the foreign investments.

Background

On 29 September last year, the Shanghai government issued the Special Administrative Measures on Foreign Investment Access to the China (Shanghai) Pilot Free Trade Zone (Negative List) (2013) (2013 Negative List), which introduced the first 'negative list' regime (Regime) in the FTZ. For sectors not covered in the list, the approval system for foreign invested projects and establishment was replaced by the filing system. Since then, more than one thousand new FIEs have been established in the FTZ using the filing system.