Outside of the FTZ, foreign investments are subject to approval by the competent Authority of Commerce. In contrast, a negative list approach is adopted for foreign investments in the FTZ. The negative list refers to a list specifying industries which are restricted or forbidden for foreign investment. For those industries which do not fall into the scope of the negative list, foreign investors can enjoy the same treatment as domestic investors in terms of market entry in the FTZ, i.e. such foreign investments are no longer subject to prior approval, but the company establishment can be registered directly with the competent Administration for Industry and Commerce.
On 30 September 2013, the Shanghai Government issued the 2013 version of the negative list (“2013 Negative List”). The 2013 Negative List mainly followed the 2011 version of the Foreign Investment Industry Guideline Catalogue and fell considerably short of expectations. Basically, almost all industries were covered by the negative list, i.e. the promised changes were just a kind of window dressing. After nine months of consideration, on 30 June 2014 the Shanghai Government released the 2014 version of the negative list (“2014 Negative List”). The 2014 Negative List took effect on the same day.
The 2014 Negative List reduces the number of industry items restricted for foreign investment by approximately 1/3 from the previous total of 190 to 139. Out of the 51 items reduced, 23 items are merged into other items and, therefore, are not really cancelled. 14 items are cancelled because they are prohibited anyway for both domestic and foreign investment and, therefore, according to general practice do not need to be reiterated in the negative list. The remaining items reduced are real cancellations and refer to areas opened up to foreign investment in the FTZ. Besides direct cancellation, restrictive measures such as limitations of investments to joint ventures in some areas have been loosened up towards foreign investment and some restrictions on investment in specific industries have also been clarified. The majority of these changes focus on manufacturing industries and various service industries such as wholesale & retail trading and transportation.
- We summarize below some of the major changes:
Click here to view table.
- Although the 2014 Negative List lifts the barriers imposed on foreign investment in certain industries and is a considerable step forward compared to the 2013 Negative List, it still falls short of expectations. For example, automobile manufacturing is still restricted. According to the 2014 Negative List, investment in the production of automobiles, specialized vehicles and farm vehicles must be in the form of joint ventures and the Chinese shareholding ratio should not be less than 50%. The same foreign investor may establish no more than two joint ventures producing similar (passenger car or commercial vehicle category) whole vehicle products in China. Manufacturing and R&D of automotive embedded electronic integrated systems shall be conducted in the form of Sino-foreign equity or cooperative joint ventures. Foreign investment in power batteries of new energy automobiles should not exceed 50%, etc. These measures in the short run protect domestic automobile manufacturers. However, with the possibility to import automobiles cheaper through the FTZ, such protection may be weakened and limited over time.
Despite the above, the issuance of the 2014 Negative List still shows the Shanghai Government’s commitment to increase feasibility of foreign investment in the FTZ.