The pledge by President Xi at the G20 Summit in Osaka that China would continue to liberalise market access has seen immediate progress in the form of a new update to the Catalogue of Encouraged Industries for Foreign Investment (the Industries Catalogue) and the publication of two revised negative lists governing foreign investment.
The new negative lists and revised Industries Catalogue will take effect on 30 July 2019 and bring about a further reduction in restricted sectors, from 48 to 40 nationwide and 45 to 37 in the free trade pilot zones. The reductions are predominantly focused in the mining, manufacturing and entertainment industries.
These measures were closely followed by an announcement by Premier Li at the World Economic Forum that China will accelerate the liberalisation of the securities, futures and life insurance sectors, with majority foreign ownership in these sectors to be permitted by 2020, ahead of the previously announced target of 2021.
As an extension of Premier Li’s announcement, a couple of weeks later on 20 July 2019, the Office of Financial Stability and Development Committee under the State Council announced a package comprising eleven opening-up measures in the financial sectors. This brings fund management in line with securities, futures and life insurance companies, on which foreign shareholding limit will be scrapped one year in advance as mentioned above. In addition, foreign investors will be further encouraged to participate in the domestic bond market as well as credit rating, wealth management, pension funds management, currency brokerage and insurance activities.
Although it remains to be seen how these measures will be implemented and the enforcement approach that will end up being taken at a local level, this represents a strong signal that China remains committed to liberalising market access and facilitating greater foreign participation in its economy, even as the trade war between the U.S. and China continues.
Read on for a summary of the key changes heralded by these announcements.
Since 2013, China has been progressively moving to a system of pre-entry national treatment, with foreign investment generally permitted, other than in sectors or industries contained in an applicable ‘negative list’, and once made regulated in the same way as domestic investment.
This reform has seen a number of iterations of the negative lists, with the negative list system finally enshrined in national law on 15 March 2019 in the form of the Foreign Investment Law of the People’s Republic of China, which will take effect on 1 January 2020. Please click here for more information.
The following new negative lists were published on 30 June 2019:
- Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2019 Version) (Nationwide Negative List); and
- Special Administration Measures on Foreign Investment Access (Negative List) in the Free Trade Pilot Zone (2019 Edition) (FTZ Negative List).
When the Nationwide Negative List and the new 2019 Industries Catalogue take effect on 30 July 2019, the 2017 version of the Industries Catalogue will be fully invalidated and fall away, having been partially invalidated by the 2018 version of the negative list. From that point, the Nationwide Negative List will contain 40 restricted or prohibited sectors (down from 48 in the 2018 negative list) and the FTZ Negative List will contain 37 restricted or prohibited sectors (down from 45 last year).
The principal effect of the new Nationwide Negative List will be to ease market entry for foreign investors in the mining, manufacturing and entertainment industries. For example:
- exploration and development of petroleum and natural gas will be capable of being conducted by wholly foreign owned enterprises.
Comment: Please note that the exploration and development of petroleum and natural gas will still require industrial approval by the Ministry of Natural Resources. Whether such mineral exploration rights will in fact be granted to wholly foreign owned enterprises remains to be seen. Advance discussion with the Ministry is recommended.
- the prohibition on foreign investment in the exploration and exploitation of molybdenum, tin, antimony and fluorite will be removed.
- domestic shipping agencies will no longer be required to be majority owned by domestic Chinese investors, but the precise limit is not made clear.
Comment: A recent press conference by the Ministry of Transport has now confirmed that domestic shipping agencies will be permitted to be in the form of a wholly foreign owned enterprise.
- the 50% shareholding cap on foreign investment in domestic multi-party communications, store-and-forward and call centre services will be removed.
Comment: It is still unclear at this stage whether these businesses will be able to be wholly foreign-owned, pending promulgation of detailed regulations by the relevant authority. We are closely monitoring the situation and will be updating interested clients on any developments.
- the requirement for Chinese partners to hold a majority share in enterprises involved in cinema construction or operation and performance brokerage agencies will be removed.
Comment: Implementing (and enforcing) this change will require amendments to the Provisional Regulations on Foreign Investment in Cinema and the Regulations for the Administration of Commercial Performances which have not yet been made. Contact us for any developments.
The FTZ Negative List will further reduce the restrictions on foreign investment in the areas of aquatic products, fishing and publication printing.
It is worth noting that exploration, exploitation and ore dressing of rare earth remain prohibited under the current Nationwide Negative List and FTZ Negative List.
As a standing national policy in China, industries encouraged for foreign investment are entitled to preferential treatment in various areas, including tax reductions or exemptions within the total investment for the import of equipment for self-use. The new 2019 Industries Catalogue will see further encouragement for foreign investments in agriculture, information transmission, software and technology services, scientific research and technological services, public facilities management, and particularly in manufacturing. For example, the development and application of artificial intelligence technologies (such as intelligent devices, robots, neural network chips and neuron sensors) is now included in the Industries Catalogue, in a call-back to China’s AI development plan, which was promulgated by the State Council in July 2017, and which further showcases China’s ambition to develop into an innovative and technologically advanced power.
It is significant to note that over 80 percent of the newly-added or revised items of the Industries Catalogue are in the manufacturing industry. Consistent with overall industrial policy, foreign investment is relatively more encouraged in sectors such as high-end manufacturing, intelligent manufacturing, and green manufacturing.
Among these sectors, the manufacturing and research and development of key components for new energy vehicles and intelligent vehicles are particularly emphasised. This continues China’s drive to establish a leading position in electric vehicles and associated supply-chains and follows on from the abolition in June 2018 of the restriction on foreign equity in new energy vehicles enterprises and the granting of approval for U.S. electric carmaker Tesla Inc. to set up a wholly-owned subsidiary in Shanghai and break ground on the Gigafactory.
The encouragement of foreign investment in key components for new energy vehicles and intelligent vehicles is expected to be conducive to the development of upstream and downstream industries around new energy and intelligent automobiles.
While these developments are positive and continue the welcome trend of liberalisation established by recent announcements, as always it remains to be seen how these measures will be implemented and enforced at a local level. The interaction of these measures with the domestic laws and policies relating to the relevant industries will also need to be closely monitored.
As always, if you have any questions in relation to recent developments or to market entry in China more generally, please reach out to a member of our team.