On 28 June 2017, the PRC National Development and Reform Commission and the PRC Ministry of Commerce jointly promulgated the new Guideline Catalogue on Industries for Foreign Investment (2017 Revision) (“Guideline Catalogue 2017”). Several days prior to the promulgation of the Guideline Catalogue 2017, on 16 June 2017, the General Office of the PRC State Council issued the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones, 2017 Revision (“FTZ Negative List 2017”). Both the Guideline Catalogue 2017 and the FTZ Negative List 2017, compared to previous versions, reduce certain restrictions and prohibitions on foreign investment and, thus, provide further access for foreign investors in certain industries.
1. Guideline Catalogue 2017
The Guideline Catalogue 2017 will enter into effect on 28 July 2017. At the same date the previous version, i.e. the Guideline Catalogue on Industries for Foreign Investment, 2015 Revision (“Guideline Catalogue 2015”), will be abolished. The Guideline Catalogue 2017 will apply to all foreign investments in the PRC outside of special pilot free trade zones (“FTZs”). The Guideline Catalogue 2017 formally introduces a negative list approach nationwide, i.e. outside of FTZs. Similar to the previous versions, the Guideline Catalogue 2017 distinguishes between industries where foreign investment is encouraged (“Encouraged Category”) and industries where foreign investment is restricted or prohibited (“Negative List”). Certain industries, e.g. construction and operation of nuclear power stations and civil airports etc., are listed in the Encouraged Category and simultaneously in the Negative List, since they are both encouraged but also subject to certain restrictions, e.g. a maximum shareholding ratio of the foreign investor.
a) Encouraged Category
Industries listed in the Encouraged Category may enjoy preferential treatment based on the relevant policies. Compared to the Guideline Catalogue 2015, the total number of encouraged industries has been decreased by 1 to 348 in total. 7 industries have been removed and 6 industries have been newly added. Further, 35 industries have been modified. The following industries have been newly added to the Encouraged Category:
- Certain industries in the field of environmental protection, e.g. manufacturing of flue gas desulfurization equipment as well as flue gas dust removal equipment;
- Certain high-tech manufacturing industries, e.g. research, development and manufacturing regarding virtual reality (VR) and augmented reality (AR) equipment as well as the manufacturing of certain 3D printing components;
- Certain industries regarding special purpose foodstuffs, e.g. the development and manufacturing of infant formula, special medical use formula and health food; and
- Development and manufacturing of smart emergency medical rescue equipment.
b) Negative List
In line with the terminology already used in the Opinions of the State Council on Implementing a “Negative List” System for the Market Access which was promulgated on 2 October 2015 as well as the reform of the PRC’s foreign investment system in October 2016, the Guideline Catalogue 2017 now formally introduces a Negative List. Since October 2016, foreign-invested entities (“FIEs”) which do not fall into the prohibited or restricted categories of the Guideline Catalogue 2015 and FIEs in the encouraged category of the Guideline Catalogue 2015 which are not subject to special requirements on the shareholding ratio or senior management are not subject to ex-ante approval anymore but only to (an ex-post) recordal with the competent PRC Authorities of Commerce. The Guideline Catalogue 2017 is in line with these principles.
(1) Restricted Category
The restricted category contains 35 industry sectors which are restricted for foreign investment. Compared to the Guideline Catalogue 2015, the number of industries in the restricted category has been reduced by 3. Foreign investments in industries listed in the restricted category may be subject to special requirements on the shareholding ratio of FIEs, special investment methods (e.g. the FIE must be established in the form of a Sino-foreign equity joint venture or cooperative joint venture), administrative approval or other restrictive measures, e.g. requirements on the nationality of the legal representative of FIEs (i.e. the legal representative has to be a Chinese national), etc. Key changes are as follows:
- The manufacturing of motorcycles is not subject to the requirement of having an equity joint venture company anymore and the limitation of having 2 equity joint ventures at the maximum for the manufacturing of motorcycles has been abolished;
- While the manufacturing of conventional automotive vehicles is still subject to the requirement that at least 50% of the equity interests are held by Chinese investors and the limitation of having 2 equity joint ventures at the maximum for the manufacturing of the same type of vehicles per foreign investor, the manufacturing of pure electric cars is now exempted from the above limitation of 2 equity joint ventures at the maximum.
Inter alia, the following industries have been completely removed from the Negative List:
- Highway passenger transportation companies as well as ocean shipping tally companies;
- Smelting of rare metals (e.g. tungsten, molybdenum, tin, antimony) and the exploration and mining of noble metals, such as gold, silver and platinum;
- Processing of edible oils, the production of biological liquid fuels and the construction and operating of large-scale agricultural products wholesale markets;
- Credit investigation and rating service companies;
- Railway passenger transportation companies (limited to Sino-foreign equity/cooperative joint venture operations); and
- Accounting and auditing services.
In addition, some restrictions regarding encouraged but restricted industries have been deleted. E.g. the manufacturing of key parts and components of new energy automotives, high energy power batteries (energy density ≥110Wh/kg, cycle life ≥2000 times) is no longer subject to the restriction that the shareholding ratio of foreign investor(s) must not exceed 50%.
(2) Prohibited Category The number of industries listed in the prohibited category has been reduced from 36 to 28 compared to the Guideline Catalogue 2015. However, especially in cultural and media related industries, certain prohibitions have even been increased. While the Guideline Catalogue 2015 prohibited the publication of books, newspapers, magazines audio-visual products and electronic publications, the Guideline Catalogue 2017 now also prohibits the editing of the aforementioned items. Further, the Guideline Catalogue 2017 now also prohibits foreign investment in radio and television on-demand businesses, installation services regarding ground facilities for receiving satellite TV broadcasts, public internet information services and the establishment and operation of research institutes regarding sociological and social sciences.
2. Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones, 2017 Revision
The FTZ Negative List 2017 entered into effect on 10 July 2017. On the same date the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones, 2015 Revision (“FTZ Negative List 2015”) has been abolished.
The FTZ Negative List 2017 is only applicable for foreign investments in FTZs. Currently, there are 11 FTZs in the PRC, i.e. in Shanghai, Guangdong, Tianjin, Fujian, Dalian, Zhoushan, Zhenzhou, Wuhan, Chongqing, Chengdu and Xi’an. Foreign investments at locations outside of FTZs are subject to the Guideline Catalogue 2017. Same as in the Guideline Catalogue 2017, foreign investments in restricted areas mentioned in the FTZ Negative List 2017 can be subject to certain requirements on the shareholding ratio of foreign investors, investment methods and administrative approval. In the areas not listed in the FTZ Negative List 2017, foreign investments will enjoy equal treatment to domestic investments. According to the FTZ Negative List 2017, there are 95 restrictions and prohibitions divided into 39 categories. Compared to the FTZ Negative List 2015, 27 restrictions/prohibitions in 19 categories have been removed. Major changes include the following:
- Investments in the field of internet access services are no longer prohibited;
- Engagement in the import of films, radio and television programs, arts and literature databases and digital publications is no longer prohibited;
- The manufacturing of railway transportation equipment is no longer limited to equity and cooperative joint venture companies. Further, the restriction that the localization ratio for equipment used in urban rail transit projects shall be at least 70% has been abolished;
- Restrictions regarding investments in highway passenger transportation companies have been removed;
- Some restrictions regarding the manufacturing of pure electric cars have been removed.
- Certain commercial services, e.g. accounting services, are subject to fewer restrictions.
In summary, the Guideline Catalogue 2017 and the FTZ Negative List 2017 further decrease restrictions and prohibitions for foreign investors in certain industries. However, in other areas, especially regarding cultural, news and media services, foreign investment is still rather extensively restricted or completely prohibited.