The final 2019 version of the Special Administrative Measures for Foreign Investment (also known as the “Negative List”), published by China’s Ministry of Commerce and the National Development and Reform Commission to come into effect from 30 July 2019, has continued the trend of liberalising foreign investment in China and shows the government’s resolve to attract more foreign investment as a key policy tool to revive the slowing economy.

Recent developments continue to show the Negative List moving towards a single exhaustive list of all market-entry restrictions on foreign investment, with the aim of having no such restrictions in laws and regulations outside the Negative List by the end of 2019. 

Sectors of interest to foreign investors in which restrictions have been removed include: 

  • oil and gas exploration, where the foreign investor no longer needs to have a Chinese joint venture partner;
  • finance (securities, life insurance, futures and fund management) where all caps on foreign investment will be removed in 2021 (Premier Li Keqiang announced on 2 July that this would happen in 2020, one year ahead of schedule);
  • cinemas, where restrictions on foreign ownership have been removed; and
  • large urban gas and heat network infrastructure and international freight forwarding, both of which no longer require Chinese majority control. 

More reform in the free trade zones is expected, though the extent of the further changes to the Negative List in the free trade zones has so far been confined to removal of restrictions on foreign ownership in the marine produce and publishing sectors.

Some restrictions remain 

It should be noted that restrictions on foreign ownership continue to exist in key sectors of the economy, such as telecommunications, e-commerce, education, hospitals, aviation and rare earth industries. Restrictions also continue to apply in the auto sector, although a timetable had been set for these to be phased out by 2022. More liberalisation is to be expected, including from Premier Li’s commitment that China would further relax foreign investment restrictions in value-added telecommunications services and transport sectors in 2020. 

Existing controls on inbound investments by Chinese-controlled offshore entities being made with their affiliated enterprises in China, which require the approval of central MOFCOM, have also been retained. 

Encouraged Foreign Investment Catalogue 

To complement the continuing market liberalisation, the newly revamped Catalogue of Encouraged Industries for Foreign Investment, comprising its sub-Catalogue of Industries Encouraged for Foreign Investment Nationwide and its sub-Catalogue of Priority Industries for Foreign Investment in Central and Western China, also effective from 30 July 2019, extend the availability of policy preferential treatment to an expanded range of foreign investments.  

There is a focus on the high-end manufacturing and advanced services sectors, and (in central-western China in particular) on the more labourintensive industries aimed at incentivisng foreign investors in these industries to relocate out of China’s eastern seaboard. The Appendix contains a summary of key new sectors added to the Catalogue.

The key preferential treatments in sectors covered by the Catalogue include:

  • projects in these sectors are entitled to customs duty exemption on equipment imported for the project’s own use within the project’s total investment;
  • preferential enterprise income tax rate of 15% for foreign invested enterprises in western China in sectors covered by the sub-Catalogue of Priority Industries;
  • projects in these sectors which satisfy certain land use criteria are entitled to the supply of land on a priority basis, plus a discount of up to 30% below the State minimum price for granted land use rights. 

Looking ahead 

The second half of 2019 is likely to be an exciting period for inbound investment (including further incentives being planned, such as expanding the Shanghai Free Trade Zone). The government could be seeking to use the liberalisation of foreign investment in China as both a negotiating tool in its trade talks with the US and a counter-measure to drive economic growth in order to mitigate the impact of US tariffs.

Appendix

Key additions/ expansions in the 2019 Catalogue of Encouraged Industries for Foreign Investment

(Note that these are general descriptions only. Refer to the actual text of the Catalogue to determine whether a particular project is covered by the Catalogue)