What is new on the Chinese Free Trade Zone Negative List 2017?

China has this year significantly trimmed its negative list, which restricts foreign investment, in its pilot free trade zones (FTZ). The State Council on June 16 released a new foreign investment negative list for free trade zones in an effort to further ease investment access.

New possibilities of foreign direct investment

The 2017 version of FTZ Negative List has largely broadened the extent of opening-up to foreign investment in Free Trade Zones and in the industry of manufacturing such as aviation and auto as well as industries of financial services such as banking services and insurance services, etc.

It should be noted that the special management measures relevant to national security, public order, public culture, financial prudence, government procurement, subsidies, special procedures, non-profit organizations and taxation that are not included in the 2017 version of the list shall still be governed by existing provisions. FTZ foreign investment that involves national security shall be subject to security review in accordance with the Trial Measures for the National Security Review of Foreign Investment in Pilot Free Trade Zones. For all industries not listed in the document, foreign investors will receive equal treatment as domestic companies in China’s free trade zones.

Investors from Hong Kong, Macao and Taiwan should also abide by the special measures and restrictions set out by the list, added the circular.

More opportunities for M&A of Chinese firms

One of the highlights of this 2017 Version is, that the mergers and acquisitions of Chinese enterprises by non-affiliated companies and not involving restricted business have been removed from the Negative List, same as the latest Foreign Investment Industrial Guidance Catalogue (2017). This will tremendously simplify the formalities of M&A, although the specific implementation rules shall come out later.

Implications of the 2017 FTZ Negative List

Compared with the management system of foreign investment in the past which is focused on pre-approval, the management system of negative list represents a brand-new idea and philosophy which is linked to internationalization. In addition, according to the Opinions of the State Council on Implementing the Market Access Negative List System, the negative list system of national market access will be officially carried out from 2018 throughout the country. Therefore, it will be helpful to understand and predict the future direction of reform of market access system involving foreign investment in China by following the 2017 version of FTZ Negative List.

In the 2017 version of FTZ Negative List, it should be aware that the management of the market entry of foreign investment has become looser and there is also a tendency of turning management system of market entry from pre-approval into middle and post-management, which is currently advocated by the government. We believe that the further innovation of management system represented by the 2017 version of FTZ Negative List will well facilitate higher level of opening-up and further restructuring of economic system in China.

Further questions on the 2017 Free Trade Zone Negative List and foreign direct investment to China can be addressed to Ms. Phenix Zheng (phenix.zheng@cwhkcpa.com).

© 2018 CW CPA. All rights reserved.