On 22 August 2012, the State Council of the PRC officially approved the establishment of the China (Shanghai) Pilot Free Trade Zone (“PFTZ”). The PFTZ was officially launched on 29 September 2013. There were 1,245 new Foreign Invested Enterprises (“FIEs”) incorporated in the PFTZ as of the end of June 2014. Out of these, 1,136 were incorporated by way of the simpler system of record filing used for FIEs investing in business sectors not in the Negative List.

The Negative List sets out the business sectors in which foreign investment is not allowed or is subject to restrictions. In all other business sectors, foreign investment is permitted. Foreign investment not covered under the Negative List will not require prior approval but, as noted, is subject to record filing only. As it has been more than one year since the official launch of the PFTZ, it is timely to look at the recent developments in the Negative List of the PFTZ.

On 30 June 2014, the Shanghai Government issued an updated version of the Negative List, repealing the 2013 version. The Negative List 2014 contains 139 items, which is less than the 190 items previously contained in the 2013 version. Notable changes are as follows:

  • Healthcare: The Negative List 2014 only includes one restriction for the healthcare industry, namely, the “establishment of branches”. The previous requirements for a minimum total investment of RMB 20mil and a required track record of at least 20 years’ of operation have been removed. Wholly foreign-owned enterprises (“WFOEs”) are allowed, and the PFTZ authorities have approved the establishment of the first WFOE hospital in the PFTZ.
  • Distribution of Salt: The Negative List 2014 allows a WFOE to engage in the business of salt distribution in the PFTZ. Distribution of salt was allowed only for joint ventures in the Negative List 2013.
  • Distribution and Despatch of Oil and Fertiliser and Retail of Food, Beverages, and Tobacco: The Negative List 2014 has removed previous restrictions on foreign investment in the business of distribution and despatch of oil and fertiliser. It has also removed the restriction that an FIE carrying on the business of distribution and despatch of grain, vegetable oil, sugar, and tobacco must be majority controlled by a PRC party if it operates more than 30 outlets.
  • International Marine Cargo Loading/Unloading and International Marine Container Piling: The Negative List 2014 removes the requirement that FIEs must be in the form of equity joint ventures or cooperative joint ventures.
  • Land Plot Development: The “restriction on investment of plot development (土地成片开发) (equity joint venture or cooperative joint venture)”, which was contained in the Negative List 2013, has been removed in the Negative List 2014.
  • Internet and Gaming: Although the Negative List 2014 removes “investment in internet access service business premises” and “investment in the gaming industry” from the list of prohibited business sectors, this does not mean that these industries are now open to foreign investment. This is because the Negative List 2014 still includes the following sectors: “industries that are prohibited or restricted by the government or by international treaties to which PRC is a signatory or a party” and “domestic investment for which the State Council has specifically retained requirement of approval”. PRC regulations still prohibit foreign (and domestic) investment in the gaming industry, and the use of business premises for carrying out an internet access service business requires an Online Cultural Business Permit.
  • Manufacturing Business: The Negative List 2014 also  relaxes  restrictions  on certain manufacturing businesses, such as cotton processing, high-yield oil processing technology development, Chinese traditional tea processing,  paper pulp production, oil refining, paint manufacturing, chemical medicine production, rare earth/metal processing, marine equipment manufacturing, etc. Note, however, that manufacturers are required to set up the factory physically within the PFTZ for such businesses.

Various authorities have also published other regulations specifically for the purpose of supporting PFTZ development. These developments, together with the increased transparency on the part of the Shanghai Government as evinced by the Negative List 2014, are an encouraging sign for the future.