Foreign investors are subject to special administrative measures for access to the Chinese market. Currently, China adopts the management system of negative list for granting foreign investors and their investments into China. The negative list sets out industries where foreign investment is prohibited or restricted. To push forward the development of an open economy, the National Development and Reform Commission and the Ministry of Commerce jointly published two updated negative lists and the encouraged industry catalogue for foreign investment on 30 June 2019, which came into force on 30 July 2019, namely:
- Special Administrative Measures for Admission of Foreign Investment (2019 National Negative List)
- Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (2019 PFTZ Negative List)
- Industry Guidelines on Encouraged Foreign Investment (2019 Encouraged Catalogue)
The structure of the updated edition remains the same as the old one (2018 Edition), while some items have been removed or modified. The number of entries in the national Negative List was reduced from 48 to 40, and the number of entries in the PFTZ Negative List was reduced from 45 to 37.
2019 National Negative List
Opening of service industries
- In the field of transportation, the restriction that domestic shipping agencies must be controlled by Chinese majority shareholders has been lifted.
- In the area of infrastructure, the restriction that Chinese majority shareholders must control the gas, heating pipelines and water supply in cities with a population of more than 500,000 has been lifted and only the restriction of water supply remains effective afterwards.
- In the cultural field, the restriction that cinemas must be controlled by Chinese majority shareholders has been removed. The restriction that performance agencies must be controlled by Chinese majority shareholders, which was removed in 2018 Pilot Free Trade Zone Negative List, is now removed nationwide.
- In the field of value-added telecommunications, restrictions on foreign investment imposed by domestic multi-party communications, store-and-forward and call center services have been lifted.
Opening of agriculture, mining and manufacturing industries
- For agriculture, the prohibition for foreign investment in wildlife resources development has been lifted.
- In the field of mining, the limitation of exploration and development of petroleum and natural gas to joint ventures and cooperation has been lifted, and the prohibition on foreign investment in exploration and development of molybdenum, tin, antimony and fluorite has been removed.
- In the manufacturing sector, the ban on foreign investment in Chinese art paper and production in ink stick has been lifted.
2019 PFTZ Negative List
The purpose of setting up Pilot Free Trade Zones is to explore the application of national treatment and the use of negative list in the foreign investment approval process, to boost opening up and innovation in the financial sector, and to provide an invest-friendly regulation environment. In 2018, opening measures regarding performance agencies and oil and gas exploration were proved successful in these Pilot Free Trade Zones and then were spreaded to the whole country. And for this time in 2019, opening measures on industries like fishing of aquatic products and printing of publications are carried out nationwide.
In addition, on 26 August 2019, the State Council announced the Promulgation of Overall Plan for the fifth batch of PFTZs, which will be set up in Shandong, Jiangsu, Guangxi, Hebei, Yunnan and Heilongjiang, in total 6 provinces.
2019 Encouraged Catalogue
Besides the Negative List, China also issued the Industry Guidelines on Encouraged Foreign Investment, which combined the “Industry Guidelines on Encouraged Foreign Investment” in the 2017 Catalogue on Industry Guidelines for Foreign Investment and the 2017 Catalogue of Priority Industries for Foreign Investment in Central and Western Region. This catalogue mainly stresses upon encouraging foreign investment to participate in high quality development of manufacturing industry. More than 80% of the new or revised items in the national catalog belong to the manufacturing sector, supporting foreign investment to pay more attention to high-end, intelligent and eco-friendly manufacturing.
- In the electronic information industry, the Catalogue further includes the development and manufacturing of 5G core components, integrated circuit etching machine, chip packaging equipment, cloud computing equipment etc.
- In the equipment manufacturing, items related to industrial robot, new energy vehicles, key components for smart vehicles are added or amended.
- For the medical and pharmaceutical industry, the Catalogue adds the development and production of new key raw materials for the production of vaccines, cell therapy drugs, and large-scale cell culture products.
- To encourage the new material industry, the Catalogue further updated the section about the development and production of new materials for aerospace, monocrystalline silicon, large silicon wafer etc.
- In the commercial services sector, the Catalogue updated the sections about project consultancy services, tax consultancy services, inspection and testing certification services etc.
- For business services and trade, cryogenic distribution, e-commerce, construction and operation of railway arterial network and railway special line are updated.
- Under the technology service sector, artificial intelligence, clean production, the development of Carbon Capture and the development and application of energy saving, and circular economy technologies are included.
- In Yunnan, Inner Mongolia, Hunan and other regions with certain distinguished agricultural resources and labor advantages, the Catalogue modifies items regarding the industries of agricultural product processing, textile clothing and furniture manufacturing.
- In Anhui, Sichuan, Shaanxi and regions where the development of electronic industry clusters is accelerating, the Catalogue adds the development and manufacturing of integrated circuit, tablet computer and communication terminal etc.
- In Henan, Hunan and regions with dense transportation and logistics network, the construction of new logistics storage facilities and auto refueling stations has been added.
The incentive policies supporting the old catalogues of encouraged industries will apply to the 2019 Encouraged Catalogue, including:
- For encouraged foreign investment projects, the import of self-use equipment within the total amount of investment shall be exempted from the customs duty and import value-added tax;
- Enterprise income tax will be collected at a reduced rate of 15% for qualified foreign invested enterprises in Western Regions which fall into the category of encouraged industries;
- Relevant land use policies are applicable to foreign-invested and domestic enterprises equally. China will continue to provide land in priority to the “encouraged-type” of foreign investment industrial projects on intensive land use; After the reserve price for land use is determined, no less than 70% of the national minimum standard for land for industrial use corresponding to the same rank of land may be implemented.
At present, China is striving to accelerate the development of emerging industries and create a strong domestic market opened to global investors, which provides not only market opportunities but a more strengthened legislative framework for supervising the foreign investments in China. Coupled with China’s new Foreign Investment Law, which will come into effect on 1 January 2020, foreign companies that are already established in China may consider the following actions:
- Revise the current market situation and explore beneficial restructuring options considering the new Negative Lists and the 2019 Encouraged Catalogue;
- Pay close attention to any changes of the local rules set forth by local competent authorities in response to the new Foreign Investment Law to be implemented soon.
As for investors who are still yet to put forward the China project:
- The Negative Lists and the 2019 Encouraged Catalogue shall be first reviewed in order to confirm whether a Wholly Foreign-Owned Enterprise can be set up or a Joint Venture is needed.
- In the latter case where a Joint Venture is considered, be aware of the upcoming changes that the Law on Sino-foreign Equity Joint Ventures, and the Law on Sino-foreign Cooperative Joint Ventures shall be repealed after the new Foreign Investment Law comes into effect on 1 January 2020. Therefore, it is strongly advisable to consult with a China legal counsel for solutions to cope with the legislative changes.
Should you wish to know more about China’s recent changes in foreign direct investment laws, please feel free to reach out to our China Consultancy Team.
Senior Manager, Greater China
FDI Legal Counsel, Greater China