By Alexander Chipman Koty and Zhou Qian
China’s State Council released an updated foreign investment negative list for its 11 free trade zones (FTZs) on June 16, 2017, removing a number of restrictions on foreign investment.
The new negative list, which comes into effect on July 10, 2017, cuts 10 items and 27 special administrative measures from the previous negative list released in 2015. The lifted restrictions on foreign investment apply to a number of industries, including mining, manufacturing, transportation, information, commercial service, finance, scientific research, and culture.
The updated negative list presents new opportunities for investment in China’s growing number of FTZs, and provides a glimpse into future economic reforms.
FTZ negative list explained
China’s negative list specifies the industries where foreign investment is prohibited or restricted in the country’s FTZs.
For prohibited industries – such as those relating to national security – foreign investment is not allowed. For restricted industries, foreign investors may need to acquire special approval or enter into a joint venture (JV) with a Chinese partner. Foreign investors enjoy domestic treatment in industries not listed on the negative list.
China currently has 11 FTZs, with the seven latest in Chongqing, Henan, Hubei, Liaoning, Shaanxi, Sichuan, and Zhejiang. The Shanghai Pilot FTZ was China’s first FTZ, launched in 2013, while FTZs in Fujian, Guangdong, and Tianjin were opened in 2015.
Changes in the new negative list
Of the 27 special administrative measures removed from the 2015 list, 10 are related to manufacturing, four to finance, and four to other services.
Overall, the new negative list reduces restrictions in over 20 industries, including railway transport equipment, pharmaceuticals, road transport, insurance, accounting and audit, and other commercial services.
Foreign investors are no longer be obligated to enter into a JV when engaging in rail transport equipment or civilian satellite manufacturing, as well as certain types of civilian helicopter design and production, for instance. The full list of removed special administrative measures can be found at the end of this article.
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Notably, restrictions may still apply for items removed from the negative list. An industry’s absence on the negative list simply means that foreign investors will be treated the same as Chinese investors in that industry.
For example, though military, police, political, and Chinese Communist Party special training institutions were removed from the negative list, those industries are blocked for Chinese investors as well, meaning that there is no effective change for foreign investors.
The 95 special administrative measures remaining are exactly half as many as there were in the first negative list introduced in the Shanghai Pilot FTZ in 2013. In 2015, the total number of measures were reduced to 139, and then to 122 in late 2015.
Evaluating the new negative list
The updated negative list comes as Premier Li Keqiang reiterated China’s commitment to trade and globalization at the World Economic Forum currently being held in Dalian, echoing the remarks President Xi Jinping made earlier in the year at Davos.
It is part of another round of economic liberalization, which includes the new Catalogue for the Guidance of Foreign Investment Industries, soon to be released by the Ministry of Commerce and the National Development and Reform Commission.
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The updated Catalogue is expected to introduce a similar style of negative list for the rest of China, effective in 2018, and to ease restrictions in similar industries as the FTZ negative list, including rail transport equipment and mining. FTZs are often treated as grounds for experimental reform in China, making it unsurprising that policies tested since the Shanghai Pilot FTZ opened in 2013 are now being carried over to the rest of China.
Many of the newly liberalized industries, however, are sectors in which Chinese companies are already dominant. China is known for its high-speed rail development, for example, a strength it hopes to export through the One Belt, One Road project.
Further, foreign investors in China’s FTZs may still be subject to national security reviews when participating in sensitive industries. Although the updated negative list provides new areas for investment, foreign investors should carefully study the opportunities and challenges that may arise in practice prior to entry.
