Respectively on June 28, 2018 and June 30, 2018, the National Development and Reform Commission and Ministry of Commerce jointly issued the Special Administration Measures on Foreign Investment Access (Negative List) (2018 Edition) (hereinafter referred to as the “2018 Negative List”) and the Special Administrative Measures on Foreign Investment Access to Pilot Free Trade Zones (Negative List) (2018 Edition) (hereinafter referred to as the “2018 Negative List of FTZ”), to be implemented respectively on July 28, 2018 and July 30, 2018.

Retaining 48 special administrative measures, the 2018 Negative List supersedes the 2017 Foreign Investment Industry Guidance Catalog, which involved 63 special administrative measures, comparatively 15 more than the current 2018 Negative List. Similarly, the 2018 Negative List of FTZ consists of 45 regulating measures, comparatively 50 less than the 2017 version.

With the reduction of regulating measures, the 2018 Negative List and 2018 Negative List of FTZ are characterized by significant opening up of market access in manufacturing industry, service industry and agriculture and energy resources. For industries as shipbuilding and aircraft manufacture, changes can found as follows:

Relevant changes in 2018 Negative List

Aircraft manufacture: The restrictions that the design, manufacture and repair of trunk airliners and regional aircrafts, design and manufacture of helicopters (3 tons and above), manufacture of ground-effect vehicles and water-effect vehicles, design and manufacture of unmanned aerial vehicles and aerostats be controlled by the Chinese party are cancelled. Also, the restriction that the design, manufacture and repair of general-purpose aircrafts be limited to equity joint ventures or contractual joint ventures is cancelled.

Shipbuilding: The restriction that the design, manufacture and repair of vessels (including segmentation) be controlled by the Chinese party is cancelled.

Relevant changes in 2018 Negative List of FTZ

Aircraft manufacture: The restrictions that the design, manufacture and repair of trunk airliners and regional aircrafts be controlled by the Chinese party; the design, manufacture and repair of general-purpose aircraft (6 tons, 9 seats and above) be limited to equity joint ventures and contractual joint ventures; the manufacture of ground-effect vehicles and water-effect vehicles, the design and manufacture of unmanned aerial vehicles, aerostats be controlled by the Chinese party are cancelled.

Shipbuilding: The restriction that repair, design and manufacture of vessels (including segmentation) be controlled by the Chinese party is cancelled.

Regarding the industries of shipbuilding and aircraft manufacture, the 2018 Negative List and the 2018 Negative List of FTZ abolish all the related restrictions and prohibitions, which mark both an unlimited business scope for wholly foreign-owned enterprises (WFOE) and a possibility of growing equity portion of foreign equity in joint ventures (JV) in these areas. From legal perspective, such changes may impact foreign investors and capital in following aspects:

For foreign investors who have the intention to invest in such shipbuilding and aircraft manufacture industries but haven’t established a company yet, all the company forms, including WFOE and JV with Chinese partners are accessible. In case of the latter, the foreign party will be entitled to a majority or controlling portion of JV’s equity.

For foreign investors who have already set up a WFOE in China, they will be able to engage themselves in an enlarged scope of business, to almost all areas of shipbuilding and aircraft manufacture. The manufacture of general-purpose aircrafts, for instance, that used to be limited to JV will be accessible to WFOEs after the effectiveness of the 2018 Negative List of FTZ.

Additionally, in case of the intention to engage Chinese capital to WFOEs, foreign investors might change the WFOEs into JVs through involvement of Chinese party and withhold the controlling equity of the company.

For foreign investors who have already set up the JV with the Chinese party in China, the removal of shareholding restrictions, for instance in the area of shipbuilding, will provide them with an opportunity to increase their influence on the operation and management of the JV through increasing their portion of JV’s equity, which might be implemented through renegotiation with the Chinese party about the equity structure.

Moreover, in case of reluctance that the Chinese party might have to the enhance of foreign investors’ influence on the operation of the company due to the increasing equity portion, the foreign investors will have an alternative to establish a WFOE that is totally under its control and separate the foreign capital from the JV, which can be significant to the Chinese party’s concern. In other word, foreign investors might obtain a greater say and growing advantages in the JV.