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

China has significantly trimmed its negative list this year, which restricts foreign investment in its pilot free trade zones (FTZ). On June 16, 2017, the State Council released a new negative list specifically for foreign investment in free trade zones in an effort to further ease access.

Major free trade zones in China

New possibilities for foreign direct investment

The 2017 version of the FTZ Negative List has largely broadened access for foreign investors to free trade zones as well as to the manufacturing industry, such as aviation and automotive and the financial services sector, such as banking and insurance, 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, as stipulated in 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 of those not involved in restricted business have been removed from the negative list – in accordance with the latest Foreign Investment Industrial Guidance Catalogue (2017). This will tremendously simplify the formalities of M&A, although the specific implementation rules shall be issued later.

Implications of the 2017 FTZ Negative List

Compared with the former management system of foreign investment which focused on pre-approval, the negative list system represents a brand new idea and philosophy linked to internationalization. In addition, according to the Opinions of the State Council on Implementing the Market Access Negative List System, the nationwide negative list system setting out national market access restrictions will be officially put into effect from 2018 onwards. Therefore, it will be helpful to understand and predict the future direction of reforms of the market access system involving foreign investment in China by following the 2017 version of the list.

In this particular version, one can clearly see that China has taken bold steps towards the liberalization of its market entry system by further relaxing restrictions on foreign investment. There is also a tendency to transition the 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 the management system represented by the 2017 version of the list will very much facilitate the further opening-up and restructuring of the economic system in China.

How can we help?

CW CPA can help overseas companies analyze the feasibility of setting up operations in China’s free trade zones and utilize their advantages as well as some preferential tax policies to do business in China. Further questions regarding the 2017 version of the Free Trade Zone Negative List and foreign direct investment to China can be addressed to Ms. Phenix Zheng (phenix.zheng@cwhkcpa.com).

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