2017 Foreign Investment Catalogue: The Debut of Nationwide Negative List in China

On 28 June 2017, the NDRC and MOFCOM jointly released the 2017 Catalogue for the Guidance of Foreign Investment. The new catalogue cuts 30 restrictive measures to foreign investors and opens up new market opportunities. The new catalogue introduces the first nationwide negative list for foreign investment by combining all restrictive measures under the "encouraged", "restricted" and "prohibited" categories into one section titled "special management measures". This negative list helps foreign investors to determine whether an investment project will be subject to the traditional MOFCOM examination and approval procedure, or instead will be governed by the new FIE record-filing regime.

The new catalogue took effect 28 July 2017.

2017 Catalogue is the Seventh Revision

Since 1995, the Chinese government has issued an investment catalogue, namely, the Catalogue of Industries for Guiding Foreign Investment and generally updated the catalogue every two to five years. The regulatory framework governing foreign investment into China changes over time because it is driven by the government's industrial policy. That is, the government uses the catalogue to direct foreign capital into industrial sectors that the government decides need encouraging because China requires foreign funding and technology, while restricting or prohibiting foreign investment in other sectors.

Where foreign investment in a sector is restricted, it is because China has overcapacity or overinvestment in that sector, or because the sector is strategically important or politically sensitive and requires close government scrutiny. Restrictions are typically structured either as caps on the economic interest that the foreign shareholder can hold (such as creating a Sino-foreign equity joint venture company (“EJV”) or Sino-foreign cooperative joint venture company (“CJV”) or imposing minimum domestic shareholding conditions), or as limitations on the number or amount of investments that can be made by each single foreign investor. Some industries are entirely closed to foreign investment, because the government considers that they are critical to national security, cause pollution, or are natural government monopolies.

On 28 June 2017, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) jointly released the seventh revision of the catalogue, that is, the Catalogue of Industries for Guiding Foreign Investment (2017 Revision) (“2017 Catalogue”). The new catalogue will replace its predecessor version (2015 Catalogue) and take effect 28 July 2017. (A draft version of the 2017 Catalogue was circulated in December 2016 for public comment).

The 2017 Catalogue follows the 2016 nationwide reform of the foreign investment regime and the shift toward a negative list approach.

Under China's traditional market access system, all foreign-invested enterprises (“FIEs”) and other foreign investment projects were subjected to a higher level of government scrutiny at the formation stage than companies or other investment projects with purely domestic investment.

Under the new regime, foreign investment is subject to "national treatment", that is, the same market access rules that apply to domestic investment, except where the foreign investment is subject to "special administrative measures" (that is, the negative list for foreign investment). Since October 2016:

  • Foreign investment projects in industrial sectors that are not covered in the negative list only need to make online record-filings with competent MOFCOM offices through a centralised management system, instead of applying for and obtaining traditional approvals.
  • Foreign investment projects in industrial sectors that are covered in the negative list are still subject to MOFCOM's traditional examination and approval procedure.

Before the release of the 2017 Catalogue, no nationwide negative list was published and, to implement the record-filing regime, the scope of the list was temporarily determined by cross reference to the restrictions and prohibitions under the 2015 Catalogue.

The First Nationwide Negative List

Under the 2015 Catalogue and previous versions, industry sectors were grouped into four categories: "encouraged", "permitted", "restricted" and "prohibited" to foreign investment. Each version of the catalogue listed out all encouraged, restricted and prohibited industries. Any industry not expressly mentioned in the catalogue would fall into the permitted category.

The 2017 Catalogue develops and adjusts the old classification structure by:

  • Preserving the previous categories of "encouraged", "permitted", "restricted", and "prohibited" industries that are the basis for determining the availability of certain preferential policies for a foreign investment project (mostly tax-related) and the level of scrutiny required for approving the project.
  • Merging industries under the restricted category and the prohibited category into a section called "special management measures for the market entry of foreign investment" (that is, the negative list), where the restricted category is composed of:
    • industries that fall into the encouraged category but are subject to further investment restrictions (typically through setting a minimum domestic shareholding condition or investor qualification requirement, or having a senior management localisation requirement). These sectors can enjoy preferential policies for encouraged industries and must comply with the market entry restrictions set out in the restricted category as well.
    • other restricted industries where foreign investment is subject to restrictive measures.

After this structural adjustment, China has the first nationwide negative list in place to guide foreign investors on market access policies, and foreign investors can refer to the list to determine whether an investment project is subject to MOFCOM's traditional examination and approval procedure or instead can benefit from MOFCOM's new record-filing regime.

Key Changes of the 2017 Catalogue

Compared with the 2015 Catalogue, the 2017 Catalogue further stimulates foreign investment and relaxes investment restrictions by:

  • Adding new sectors to the encouraged category, to drive foreign investment into businesses involving advanced manufacturing, energy saving technologies and environmental protection technologies.
  • Reducing the number of restrictive measures to foreign investors from 93 to 63.
  • Liberalising certain market access restrictions in the industrial sectors of manufacturing, mining and services.

Changes in Encouraged Category

In the encouraged category, compared with the 2015 Catalogue, the 2017 Catalogue:

  • Adds a few new industrial sectors, including:
    • development and manufacture of formula food products for special medical purposes;
    • manufacture of intelligent emergency medical rescue devices;
    • research, development and manufacture of virtual reality (VR) and augmented reality (AR) devices;
    • construction and operation of hydrogenation refuelling stations;
    • manufacture of flue gas desulfurisation equipment and flue gas dust removal equipment;
    • establishment and operation of city parking facilities; and
    • development and manufacture of key components for 3D printing devices.
  • Removes the joint venture or minimum domestic shareholding conditions imposed on certain industrial sectors (but still keeping these sectors within the encouraged category), including:
    • exploration and exploitation of unconventional oil and gas such as coal-bed methane, oil shale, oil sands, shale gas and so on;
    • utilisation of mine gas;
    • automobile electronic bus network technologies;
    • electronic controllers for electric power steering system; and
    • design and manufacture of civil satellites and manufacture of civil satellite payloads.
  • Removes a few industrial sectors (including the minimum domestic shareholding conditions or senior management localisation requirement associated with each of them) completely from the encouraged category and the catalogue, including:
    • track transportation equipment;
    • manufacture and maintenance of marine engineering equipment;
    • manufacture of low and medium-speed diesel engines of vessels and bent axle;
    • accounting and auditing; and
    • construction and operation of comprehensive water control projects.

This means that these sectors on the one hand are not subject to any minimum domestic shareholding condition or senior management localisation requirement, but on the other hand are moved from the encouraged category into the permitted category.

The government's policy on the encouraged category has been relatively stable in recent years, and the mild changes in this category are to further encourage foreign investment to flow into areas such as advanced manufacturing, high technology, energy saving technologies and environmental protection technologies.

Changes in Restricted Category

In the restricted category of the 2017 Catalogue (and compared with the 2015 Catalogue):

  • The number industrial sectors subject to restrictive measures is reduced from 38 to 35.
  • Of the 35 sectors, ten appear in the encouraged category as well but are subject to further investment restrictions. (For a list of these sectors and the attached restrictive measures, see Sectors appear in both encouraged and restricted categories: table.)
  • Certain industrial sectors are completely removed from the catalogue (which means that they have moved to the permitted category). Key sectors of this type include:
    • manufacture of motorcycles;
    • processing of edible oils and fats, rice, flour and crude sugar, and deep processing of corn;
    • production of biological liquid fuels;
    • exploration and mining of precious metals and lithium ore, and smelting of certain rare metals; and
    • services in relation to road passenger transport, ocean tally cargo, credit enquiry and ratings firms, and construction and operation of large-scale agricultural products wholesale markets.

In addition, the 2017 Catalogue clarifies that foreign investors are not allowed to set up any foreign invested partnership in a restricted industry having any restriction on the foreign shareholding ratio.

The 2017 Catalogue also reiterates that the current regulatory regime on the acquisition of affiliated Chinese companies in the form of roundtrip investment remains effective and must be complied with. This seems to suggest that:

  • For any roundtrip acquisition, MOFCOM approval would still be required regardless of the industry sector that the acquisition falls into.
  • For other foreign acquisitions of the assets or equity of domestic Chinese companies, the new MOFCOM record-filing measures would apply. This change was also proposed under the draft FIE record-filing measures circulated on 26 May 2017.

Sectors appearing in both encouraged and restricted categories: table

Changes in prohibited category

In the prohibited category, compared with the 2015 Catalogue, the 2017 Catalogue,

  • Reduces the number of prohibited items from 36 to 28.
  • Removes ten prohibited sectors from the catalogue because these common restrictive measures would apply equally to domestic and foreign-invested businesses and will be reflected in the negative list for market access. These ten sectors are:
    • processing of traditional Chinese medicinal materials;
    • ivory carving;
    • tiger bone processing;
    • construction and operation of certain power plants using coal-fired and steam condensation thermal generator sets within grand grids;
    • construction and operation of natural reserves and internationally important wetlands;
    • education institutions in military affairs, police, politics and other special fields, and CCP party schools;
    • construction of golf courses and villas;
    • projects endangering the safety and performance of military facilities;
    • gambling and lottery industry (including horse race tracks for gambling purposes); and
    • pornography industry.
  • Strengthens the restrictions on foreign investment in cultural areas by prohibiting foreign investors from engaging in the businesses of:
    • editorial of books, newspapers, periodicals, audio-visual products and electronic publications;
    • radio and television video-on-demand services and services for installing satellite television and radio ground receiving facilities;
    • radio and television program imports;
    • internet news information services;
    • internet public information release services; and
    • humanities and social sciences research institutes.

Sector-by-Sector Commentary on Vital Industries

The practical impact of the changes is less than the number of the changes would suggest, as many are not actual changes in law but merely either codify existing provisions found in industry-specific regulations and policies, or clarify wording that was vague in the 2015 Catalogue.

Sector-by-sector, investment changes and industry policies for core sectors are:

Automobile

This sector presents a mild encouragement.

The manufacture of automobile whole vehicles and special use vehicles remains within the restricted category.

The 2015 Catalogue required a foreign investor to involve a Chinese partner holding at least 50 percent of the equity interest, and prohibited any individual foreign investor from investing in more than two joint ventures that manufacture the same category of whole vehicles, except where the foreign investor acquires other domestic auto manufacturers jointly with its Chinese partners. The 2017 Catalogue keeps these restrictive measures but expressly allows a foreign investor to establish more than two joint ventures to manufacture purely electric whole vehicles.

In addition, the 2017 Catalogue moves the manufacture of motorcycles from the restricted category into the permitted category and no longer imposes any minimum domestic shareholding condition or joint venture restriction for this business.

Services

The 2017 Catalogue has opened up investment in some services industries.

Services in relation to road passenger transport, ocean tally cargo and credit enquiry and ratings firms have moved from the restricted category into the permitted category, and the joint venture requirement for ocean tally cargo services is removed.

Accounting and auditing services have moved from the encouraged category into the permitted category, but the requirement that the managing partner must be a Chinese citizen is removed.

Technology

This sector presents a strong encouragement to those areas that the government decides to develop with priority.

The 2017 Catalogue encourages foreign investment to flow into businesses with high technology, energy saving technologies and environmental protection technologies, for example, the development and manufacture of VR and AR devices and key components for 3D printing devices.

Banking

This sector presents no change.

Under the 2017 Catalogue, foreign investment into the banking sector is subject to the following restrictive measures:

  • A single foreign financial institution, together with its affiliates, may invest in no more than 20 percent of the shares of a domestic Chinese commercial bank as promoter or strategic investor.
  • Multiple foreign financial institutions, together with their affiliates, may invest in no more than 25 percent of a domestic Chinese commercial bank as promoter or strategic investor.
  • Only foreign banking financial institutions may invest in domestic Chinese rural small-to-medium financial institutions.
  • Only foreign commercial banks may be the sole shareholder or controlling shareholder of an FIE bank while other types of foreign financial institution may invest as non-controlling shareholders.

The first three restrictions were already seen in the 2015 Catalogue and the last one is newly added in the 2017 Catalogue. However, this addition is not a new change but just a codification of the existing rules that can be found in the Administrative Regulations of the People's Republic of China on Foreign-Invested Banks 2014.

Life Sciences and Health Care

This sector presents no change, except that the development and manufacture of formula food products for special medical purposes and the manufacture of intelligent emergency medical rescue devices are now placed under the encouraged category.

The medical institution sector remains within the restricted category and is still subject to a joint venture requirement.

Real Estate and Infrastructure

This sector presents a mild encouragement.

Going forward, the establishment and operation of city parking facilities is an encouraged industry. In addition, the construction and operation of comprehensive water control projects no longer requires absolute Chinese control. However, given that all infrastructure projects are initiated by local governments through their corporate arms, it is yet to be seen whether these will be operated as anything other than joint ventures in practice.

The construction and operation of large-scale theme parks was classified as a restricted industry in the 2015 Catalogue. The 2017 Catalogue removes this sector from the catalogue as both Chinese and foreign investors are supposed to be subject to the same restrictions which have been set out in the draft pilot negative list for market access.

The construction and operation of cinemas was a restricted industry in the 2015 Catalogue with an absolute Chinese control requirement. The situation is the same with the 2017 Catalogue.

As in the 2015 Catalogue, the 2017 Catalogue classifies investment into other types of real estate into the permitted category. However, the Chinese government has imposed significant legislative restrictions on foreign investment in real estate, which a mere classification to the permitted category does nothing to unwind. It is yet to be seen how those policy restrictions on foreign investment in real estate will develop in future.

Education

This sector presents no change.

Investment into pre-school education institutions, senior secondary schools and higher education institutions was classified in the restricted category in the 2015 Catalogue, and the 2017 Catalogue is the same. Investment in these institutions and schools can only take the form of a CJV with the Chinese side having dominant control, which means that the principal or head administrator and at least half of the members of the managing body must be Chinese citizens.

Investment into non-degree occupational training institutions was classified in the encouraged category under the 2015 Catalogue, and the 2017 Catalogue is the same. However, due to the lack of implementing legislation in this area, in most parts of China foreign investment into these institutions still must be through a CJV, except for certain trial programmes in a few pilot areas.

Telecoms

This sector presents no change.

Although the new catalogue explicitly requires the scope of the telecoms services open to foreign investment to be limited to the types of business allowed under China's WTO commitments, in practice, the situation on the ground is generally more restrictive than the WTO rules would suggest. Most of those committed services have never been accessible to foreign investors, for example, no foreign investor has ever been approved to invest in a basic telecoms service business in China.

As in the 2015 Catalogue, the 2017 Catalogue puts telecoms services in the restricted category and imposes a foreign shareholding cap of 50% on value-added telecoms services and an absolute Chinese control on basic telecoms services. However, operating e-commerce is expressly carved out and foreign investors can set up wholly foreign-owned enterprises (“WFOEs”) to operate e-commerce platforms in China.

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